U.S. bonds were mostly flat in the first quarter as longer-term Treasury yields increased. The Federal Reserve kept short-term interest rates low and persisted with its program of purchasing $85 billion in Treasury and mortgage-backed securities every month. Municipal bonds generated positive returns, with long-term high yield tax-free securities outperforming short-term and high-quality issues. Revenue bonds outperformed local and state general obligations (GOs).
The Tax-Free Short-Intermediate Fund returned 0.74% in the quarter compared with 0.59% for the Barclays 1−5 Year Blend (1−6 Year Maturity) Index and 0.42% for the Lipper Short-Intermediate Municipal Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 2.24% versus 2.00% for the Barclays 1−5 Year Blend (1−6 Year Maturity) Index and 2.44% for the Lipper Short-Intermediate Municipal Debt Funds Average. The fund's average annual total returns were 2.24%, 3.62%, and 3.17% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.50% as of its fiscal year ended February 29, 2012.
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We are overweight to revenue sectors that offer some incremental yield over GOs and prerefunded bonds, while the balance of our investments is broadly diversified across all sectors of the market. At the end of the period, however, those yield advantages had compressed, and it has become a bit more challenging to find good opportunities during the current period of low issuance. As a result, our cash levels have increased again as we approach tax season. This is a seasonal pattern in our segment of the tax-exempt market. Our overweight in revenue bonds and duration management served us well, but some of our competition kept a higher allocation to both high yield bonds and individual sectors that outperformed, which trimmed the fund's performance.
In this low-rate environment, long-term bonds and lower-rated sectors still represent reasonable value relative to taxable fixed income alternatives. While we are comforted somewhat by Federal Reserve assurances that interest rate hikes are not imminent and by the demonstrated ability of states to balance their budgets in tough times, we are mindful that municipal yields are at or near historic lows and 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 our portfolio's interest rate sensitivity.