High-quality, short-term Maryland municipal bonds generated modest first-quarter gains. Longer-term municipal bond yields drifted lower, while shorter-term yields edged slightly higher. Short-term and high-quality bonds generally underperformed long-maturity and lower-quality debt, respectively, over the past three months. The low interest rates of the last few years continue to contribute to a supply/demand imbalance by increasing the attractiveness of borrowing for longer periods to lock in currently favorable financing costs, leading to less issuance of short-term bonds to offset maturing debt. Maryland's credit quality remains quite strong relative to other states.
The Maryland Short-Term Tax-Free Bond Fund returned 0.17% in the quarter compared with 0.18% for the Lipper Short Municipal Debt Funds Average. For the 12 months ended March 31, 2015, the fund returned 0.83% versus 0.79% for the Lipper Short Municipal Debt Funds Average. The fund's average annual total returns were 0.83%, 0.87%, and 1.96% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.53% 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.
Our investment strategy was relatively unchanged over the past three months. In general, we prefer to own higher-yielding revenue sectors versus general obligation bonds and we target a neutral interest rate posture for your fund relative to the benchmark. We have learned to adapt and adjust our investing strategy, as the periodic supply constraints in the short-maturity Maryland market can limit our flexibility at times. In recent months, we have shortened the portfolio's duration (a measure of interest rate sensitivity) and its weighted average maturity due to the prospect of rising interest rates later this year. In addition, while we added a bit more to the health care sector, our greatest sector emphasis remained on higher-quality general obligation bonds.
Looking ahead, we expect periods of considerable yield volatility on short-term bonds. We believe the Federal Reserve will increase the federal funds rate later this year and yields on short-term bonds will move higher. However, we hesitate to get overly bearish on short-term bonds because we don't think we are at the beginning of a protracted move to a materially higher fed funds rate. We are sure the Fed wants the overnight rate higher than it is today, but not high enough to significantly do damage to the bond market and, more importantly, the economy. As always, we strive to find attractively valued bonds issued by municipalities with good long-term fundamentals-an investment strategy that we believe will continue to serve our investors well.