Tax-free municipal bonds edged lower in the second quarter of 2015 but held up better than taxable bonds. Munis fell along with Treasuries in response to rising long-term interest rates, a strengthening economy, and concerns that the Federal Reserve would begin raising short-term interest rates later in 2015. However, munis held up better than U.S. government bonds amid light issuance and solid demand for tax-free issues. In the muni market, lower-quality and longer-maturity bonds lagged higher-quality and shorter-term issues, respectively. Late in the quarter, bonds issued by Puerto Rico, a major muni issuer, fell sharply after its governor said that the commonwealth's debt was "not payable."
The New Jersey Tax-Free Bond Fund returned −1.38% in the quarter compared with −1.54% for the Lipper New Jersey Municipal Debt Funds Average. For the 12 months ended June 30, 2015, the fund returned 3.23% versus 2.14% for the Lipper New Jersey Municipal Debt Funds Average. The fund's average annual total returns were 3.23%, 4.56%, and 4.14% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 0.51% as of its fiscal year ended February 28, 2015.
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.
The State of New Jersey remains the fund's largest guarantor, but we have reduced our exposure due to ongoing concerns about the state's increased budgetary pressures. We maintain a sizable allocation to the health care and transportation sectors. We continue to favor hospitals and select life care names for their attractive yields, though opportunities in these areas are difficult to find. The fund's duration, a gauge of its sensitivity to interest rate changes, was close to that of the Barclays index. We are concerned about New Jersey's fiscal outlook, given that the state faces significant future liabilities for pension and other post-employment benefit (OPEB) obligations. While New Jersey has taken steps toward pension reform it continues to fall short of its annual required contribution for pensions.
We believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. As the Fed prepares to tighten monetary policy, we are mindful that rising rates would likely weaken the appetite for bonds with higher interest rate risk. However, the transition to higher rates may not be as painful as some fear. While we believe that many states deserve high credit ratings and will be able to continue servicing their debts, we have longer-term concerns about significant funding shortfalls for pensions and OPEB obligations in some jurisdictions. Although few large plans are at risk of insolvency in the near term, the magnitude of unfunded liabilities is becoming more conspicuous in a few states. Ultimately, we believe 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.