U.S. investment-grade bond returns were mostly flat in the third quarter, as price gains in September offset earlier losses. Longer-term Treasury interest rates rose to two-year highs through early September. However, bond prices rallied and yields retreated late in the quarter as the Fed unexpectedly delayed a widely expected reduction of asset purchases in September and a federal government shutdown and debt ceiling impasse appeared likely. In the municipal market, long-term bond prices fell as 30-year muni yields rose for the quarter but finished below their highest levels. Short- and intermediate-term securities performed better than long-term issues as yields declined for the quarter. Lower-quality municipals in the investment-grade universe fared worse than higher-quality issues. High yield munis also struggled.
The New Jersey Tax-Free Bond Fund returned −0.28% in the quarter compared with −1.68% for the Lipper New Jersey Municipal Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned −2.92% versus −4.46% for the Lipper New Jersey Municipal Debt Funds Average. The fund's average annual total returns were −2.92%, 5.55%, and 3.96% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.51% as of its fiscal year ended February 28, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
From a sector perspective, health care and education names represent our most significant overweights, with a meaningful allocation in hospitals. While New Jersey does not have the higher-rated hospitals we favor, we own names that we believe are fundamentally sound and represent high quality for the state. In terms of credit quality, the fund is overweight in A rated bonds. We continued reducing our exposure to Puerto Rico and have less than 1% of our allocation associated with the commonwealth and own none of its general obligation debt. The State of New Jersey remains the portfolio's largest guarantor, but we have lower exposure in these credits compared with our peers. In terms of yield curve positioning, the fund is overweight in the intermediate portion and neutral at the long end of the curve versus the benchmark. We have added to the intermediate portion of the curve in recent quarters partly because longer-maturity bonds are typically difficult to source in New Jersey.
This year's decline in municipal bond prices has rattled some investors, but it does not represent a fundamental change in the nature, quality, or risk characteristics of the market. We continue to believe that it is a high-quality market, with good investment opportunities for those with a long-term focus and attractive tax-free income in what is still a very low interest rate environment. Recent underperformance of long-term munis makes their nominal and taxable-equivalent yields even more attractive, but if market outflows persist and rates resume rising, further price declines are likely. Given the potential for rates to rise further, we will remain careful with any investment shift that might materially increase our portfolio's interest rate sensitivity. Irrespective of interest rate movements, the credit and economic environment for municipalities is likely to remain challenging. Cutbacks in state support and persistent downward pressure on property tax revenues could keep local municipal issuers vulnerable. If the economy weakens, municipalities would face even tougher challenges.