Tax-free municipal bonds advanced and outperformed taxable bonds in the third quarter of 2014. Municipal debt moved roughly in tandem with longer-term Treasuries, whose interest rates declined due to increased geopolitical risks and concerns about sluggish global growth, despite the Federal Reserve's ongoing tapering of its asset purchases. Steady demand for munis and generally limited supply were also favorable factors. Short- and intermediate-term Treasury note and municipal yields increased as investors began to anticipate the onset of Fed rate hikes around mid-2015. Long-term and lower-quality municipals outperformed short-term and higher-quality issues, respectively, as investors continued seeking securities with relatively attractive yields.
The New Jersey Tax-Free Bond Fund returned 1.97% in the quarter compared with 1.77% for the Lipper New Jersey Municipal Debt Funds Average. For the 12 months ended September 30, 2014, the fund returned 8.89% versus 8.47% for the Lipper New Jersey Municipal Debt Funds Average. The fund's average annual total returns were 8.89%, 4.79%, and 4.42% for the 1-, 5-, and 10-year periods, respectively, as of September 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, which has worsened the state's pension funding problem. As a result, we continued our efforts to pare our exposure to the state guarantor, though it has been challenging to find alternatives with similar yield. There are fewer opportunities for diversification away from the state guarantor due to the nature of much of the issuance in New Jersey. We are positioned neutral to 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, so we have limited opportunities to invest in longer-dated bonds. We continue to favor select life care names for their attractive yields. During the quarter, we increased our allocation to health care and transportation, and reduced our exposure in prerefunded bonds.
The municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income, though we acknowledge that it has become challenging to find attractive yields outside of Puerto Rico and other distressed segments of the market. We are concerned about the potential for rising rates, but believe that further rate increases will be at a more measured pace than what we witnessed last year. 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. Although Detroit and Puerto Rico have separately taken steps to strengthen their troubled finances, developments in each could adversely affect the muni market in the period ahead. Fundamentally, the credit environment for municipalities is generally sound and should improve with the economy. Over the long term, we remain concerned about state and local government liabilities such as pension benefits and retiree health care costs.