Tax-free municipal bonds produced positive returns but trailed taxable bonds in the first quarter. New Jersey bonds outperformed the national index as investors sought out higher-yielding securities. Limited supply and solid demand have created a strong technical environment for munis, despite the Fed's December rate hike and the potential for additional rate increases this year. Nationally, year-over-year issuance has been declining due to a sharp drop in refinancing activity, while muni market inflows have been strong. Longer-maturity muni bonds outperformed shorter-maturity issues, and lower-quality securities outperformed higher-quality bonds. In terms of sector performance, revenue bonds outperformed state and local general obligation bonds.
The New Jersey Tax-Free Bond Fund returned 1.61% in the quarter compared with 1.63% for the Lipper New Jersey Municipal Debt Funds Average. For the 12 months ended March 31, 2016, the fund returned 3.71% versus 3.19% for the Lipper New Jersey Municipal Debt Funds Average. The fund's average annual total returns were 3.71%, 5.91%, and 4.58% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.51% as of its fiscal year ended February 28, 2015.
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Given the state's ongoing fiscal problems, we were vigilant about keeping our direct exposure to the State of New Jersey at historic lows. This positioning-which is well below that of our peer group-reflects our longstanding concerns about the state's underfunded pension system and persistent budgetary pressures despite improved revenues. We maintained a sizable allocation to the health care sector, which typically offers higher-than-average yields, along with significant positions in education and transportation bonds. Our overweight positioning in bonds with maturities of 15 years and longer provides added yield, and we believe it will serve us well going forward due to our expectations for higher short-term rates as the Fed slowly tightens monetary policy.
We believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. While fundamentals are sound overall and technical support should persist, investors should expect modest returns in 2016, perhaps just earning the coupon income offset somewhat by modest declines in principal values. Munis should be less susceptible to rising rates than Treasuries given their attractive tax-equivalent yields and the steady demand for tax-exempt income. Ultimately, we believe that T. Rowe Price's independent credit research is our greatest strength and will remain an asset for our investors as we navigate the current market environment.