Tax-free municipal bonds produced solid gains in the second quarter and outperformed taxable bonds. Longer-term Treasury yields extended their first-quarter decline amid concerns about a surprise first-quarter U.S. economic contraction, continued tensions with Russia over Ukraine, and growing instability in Iraq. The yield decline occurred despite solid employment gains and the Federal Reserve's continued tapering of its monthly asset purchases. Intermediate- and long-term municipal rates declined more than comparable Treasury yields, but short-term yields in both markets were little changed. Longer-term and lower-quality municipals outperformed shorter-term and higher-quality issues, respectively.
The New Jersey Tax-Free Bond Fund returned 2.69% in the quarter compared with 2.40% for the Lipper New Jersey Municipal Debt Funds Average. For the 12 months ended June 30, 2014, the fund returned 6.49% versus 4.76% for the Lipper New Jersey Municipal Debt Funds Average. The fund's average annual total returns were 6.49%, 5.78%, and 4.56% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.52% as of its fiscal year ended February 28, 2014.
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We are concerned about the state of New Jersey's fiscal outlook, particularly given its recent decision to cut scheduled pension payments, worsening the state's pension funding problem. As a result, we continued our efforts to pare our exposure to the state guarantor, but note that diversifying away from the state guarantor is difficult given the nature of much of the issuance in the state. We are overweight versus the benchmark in bonds with maturities of 15 years and longer. Issuers in New Jersey tend to issue less long-term debt than other states, which has limited opportunities to invest in longer-dated bonds. While our peers have purchased higher-yielding Puerto Rican debt, we typically seek yields in select life care names. During the quarter, our hospital allocation declined, as did higher education, dedicated tax, and local general obligation (GO) exposure. On the other hand, our toll road and life care allocations rose. Health care and education names represent our largest overweights, and we maintain a meaningful allocation in hospitals.
We still believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. We are concerned about the potential for rising rates, but believe that further rate increases will occur at a more measured pace than what we witnessed in 2013. We also believe that short- and intermediate-term rates could be more volatile than long-term rates as we approach the first Fed rate hike. Detroit and Puerto Rico have generated negative headlines over the past year and could affect the muni market in the near term. Ultimately, we believe that our independent credit research is our greatest strength and will remain an asset for our investors as we navigate the current market.