Tax-free municipal bonds produced modest positive returns in the first quarter, marginally outperforming taxable bonds. Long-term municipal yields rose with long-term Treasury yields during the quarter amid favorable economic data, reduced U.S. fiscal policy uncertainty, and greater investor willingness to invest in equities and other riskier assets. Shorter-term municipal securities narrowly outperformed longer-term issues. Lower-quality issues with a yield advantage outpaced investment-grade issues, as credit spreads continued to tighten. The U.S. economy was resilient in the first quarter, strengthening after a late-2012 slowdown tied to fiscal policy uncertainty. Despite some tax increases starting in January and automatic budget cuts that took effect in March after a two-month delay, the economy seems to have expanded at a moderate rate during the quarter.
The New Jersey Tax-Free Bond Fund returned 0.38% in the quarter compared with 0.17% for the Lipper New Jersey Municipal Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 6.05% versus 5.33% for the Lipper New Jersey Municipal Debt Funds Average. The fund's average annual total returns were 6.05%, 5.85%, and 4.63% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.53% as of its fiscal year ended February 29, 2012.
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Hospitals represent our largest overweight sector. Unlike highly rated hospitals in other states like Georgia and Virginia, hospitals in New Jersey tend to fall in the BBB and A rated quality baskets, providing more attractive yields. Our fundamental credit research platform allows us to identify attractive risk-adjusted opportunities in non-AAA rated bonds. We strive to maintain an overweight to longer- maturity revenue bonds. However, we are roughly even with the benchmark in the longest maturities due to a lack of available supply and the difficulty of sourcing long-dated bonds that offer value and have a non-state guarantor. We continue to favor A rated credits and have added to this group the most in recent quarters. The fund's duration, which measures its sensitivity to interest rate changes, remains slightly longer than that of the benchmark, reflecting our preference for longer-maturity bonds that offer the most compelling value in the continuing low-rate environment.
While we are pleased with the tremendous performance of municipal bonds over the last two years, we believe that returns in the period ahead will moderate, as the credit environment for municipalities will likely remain challenging and yields are unlikely to fall significantly from current levels. Modest economic growth and improving tax revenues are providing some support for state and local governments. However, cutbacks in state support for municipalities and persistent downward pressure on property tax revenues could keep local municipal issuers vulnerable. In this low-rate environment, we believe long-term bonds and A rated sectors still represent reasonable value relative to taxable fixed income alternatives. However, we are mindful that municipal yields are at or near historical lows and that there is the potential for losses if rates rise in response to stronger economic growth or inflation. Although we expect rates to stay range bound in the period ahead, we are careful with any investment shift that might materially increase the portfolio's interest rate sensitivity.