Short-term Maryland tax-free bonds posted modest third-quarter gains. Munis generated positive returns and were among the best-performing asset classes in the third quarter as U.S. economic data were generally strong and the Federal Reserve kept short-term rates steady during the quarter-although the Fed is likely to raise rates in coming months. Light issuance and solid demand for tax-free income provided support for the municipal market. There were large fluctuations in municipal yields in anticipation of the onset of tighter Fed monetary policy and in response to turmoil in global markets.
The Maryland Short-Term Tax-Free Bond Fund returned 0.35% in the quarter compared with 0.35% for the Lipper Short Municipal Debt Funds Average. For the 12 months ended September 30, 2015, the fund returned 0.46% versus 0.31% for the Lipper Short Municipal Debt Funds Average. The fund's average annual total returns were 0.46%, 0.71%, and 1.86% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.53% as of its fiscal year ended February 28, 2015.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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Our investment strategy was relatively unchanged over the past three months. We prefer to own higher-yielding revenue sectors versus general obligation bonds, and we maintained a slightly longer-than-benchmark interest rate posture relative to the benchmark. The longer-maturity profile allowed the fund to profit from extra yield and price appreciation as bonds "roll down the yield curve" and draw closer to maturity. We have maintained a zero allocation to bonds issued by the Commonwealth of Puerto Rico, which benefited relative performance. Puerto Rico's bonds are triple tax-free for Marylanders but too risky, in our view.
We believe that the high-quality Maryland municipal bond market offers good opportunities for long-term investors seeking tax-free income. We expect increased volatility in the short end of the yield curve as the Federal Reserve moves toward interest rate normalization. However, we do not believe that rates will move considerably higher in the near term. We are mindful that rising rates could weaken the appetite for bonds with higher interest rate risk. However, with the Fed likely to act cautiously, the transition to higher rates may not be as painful as some fear. Ultimately, we believe that T. Rowe Price's independent credit research is our greatest strength and that it will remain an asset for our investors as we navigate the current market environment.