Tax-free municipal bonds produced positive returns but trailed taxable bonds in the first quarter of 2016. Munis lagged a brisk rally in Treasuries stemming from global risk aversion during the first part of the quarter. Treasuries maintained their gains later in the quarter amid reduced expectations for the Federal Reserve to raise short-term interest rates in 2016. Intermediate- and long-term Treasury yields fell sharply, while municipal yields decreased to a lesser extent. In the municipal market, longer-maturity bonds outperformed shorter-maturity issues, and lower-quality securities outperformed higher-quality debt. High yield tobacco bonds performed particularly well, outpacing the broad municipal market by a wide margin.
The Tax-Free High Yield Fund returned 1.96% in the quarter compared with 2.05% for the Barclays 65% High-Grade/35% High-Yield Index and 2.07% for the Lipper High Yield Municipal Debt Funds Average. For the 12 months ended March 31, 2016, the fund returned 4.28% versus 3.82% for the Barclays 65% High-Grade/35% High-Yield Index and 4.85% for the Lipper High Yield Municipal Debt Funds Average. The fund's average annual total returns were 4.28%, 8.06%, and 5.07% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.69% 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 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.
In general, we prefer revenue bonds to general obligation (GO) debt because they offer the relative security of specific claims on revenues versus the generic pledges of taxing power associated with GOs. This positioning benefited relative performance as revenue bonds outperformed GOs. Within the revenue bond sector, we were overweight industrial bonds, which performed well. We were underweight the leasing, power, and special tax subsectors, which helped relative performance as bonds in these segments lagged. However, security selection in the industrial revenue subsector weighed on relative returns.
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. If the economic recovery prompts the Fed to continue raising rates, muni bond yields are likely to rise along with Treasury yields, although probably not to the same extent. While higher yields typically pressure bond prices, we expect rate increases to be gradual and modest. 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.