Tax-free municipal bonds produced gains in the first quarter of 2015 but lagged taxable bonds. Munis benefited from a rally in Treasuries as longer-term interest rates declined amid slowing U.S. economic growth, low inflation, attractive yields relative to sovereign debt in developed non-U.S. countries, and a belief that the Federal Reserve will not raise short-term interest rates hastily or rapidly. In the muni market, lower-quality, longer-maturity revenue bonds generally outperformed higher-quality, short-maturity issues and general obligation (GO) debt as investors continued to seek attractive yields in the ongoing low-rate environment.
The Tax-Free High Yield Fund returned 1.54% in the quarter compared with 1.05% for the Barclays 65% High-Grade/35% High-Yield Index. For the 12 months ended March 31, 2015, the fund returned 10.59% versus 7.35% for the Barclays 65% High-Grade/35% High-Yield Index. The fund's average annual total returns were 10.59%, 7.25%, and 5.27% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.68% as of its fiscal year ended February 28, 2014.
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 Tax-Free High Yield Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
We are underweight in GOs as a result of our concerns about the long-term liabilities many state and local borrowers face in both pension and health care obligations to retirees. We prefer revenue bonds in general because they offer the relative security of specific claims on revenues versus the generic pledges of taxing power associated with GOs. Within the revenue bonds sector, the portfolio has considerable exposure to the health care segment, where issuers have bolstered their balance sheets to offset potential margin compression from state and local payors, enhancing their creditworthiness. Security selection in health care benefited the fund's performance relative to the index, although our issuer picks in the industrial revenue segment detracted.
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, there could be hurdles later in 2015. In particular, with the Fed preparing to tighten monetary policy, we are mindful that rising rates would likely weaken the appetite for bonds with higher interest rate risk. 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.