High-quality, short-term Maryland municipal bonds generated relatively flat performance in the fourth quarter of 2014. Short-term and high-quality bonds generally underperformed long-maturity and lower-quality debt, respectively, over the past three months. The T. Rowe Price economics team believes that the Federal Reserve will begin to raise short-term interest rates in mid-2015. However, in recent months, short-term Treasury rates have moved modestly higher, while short- and intermediate-term municipal yields were little changed. This has made short-term munis relatively expensive versus taxable alternatives.
The Maryland Short-Term Tax-Free Bond Fund returned −0.04% in the quarter compared with 0.00% for the Lipper Short Municipal Debt Funds Average. For the 12 months ended December 31, 2014, the fund returned 0.63% versus 0.95% for the Lipper Short Municipal Debt Funds Average. The fund's average annual total returns were 0.63%, 0.84%, and 1.87% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. 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.
Because of the nature of the short-term Maryland bond market, we hold a significant allocation in general obligation debt with a focus on bonds issued by local authorities. We favor and have a large absolute weight, and relative overweight, to revenue-backed debt. We intend to keep a slightly longer maturity and duration position than our benchmark. (Duration measures a fund's sensitivity to changes in interest rates.) We have increased our allocation to health care holdings, particularly in the hospitals segment. We also added to our allocation in higher education bonds.
While Fed tightening will be the subject of many headlines, we are less concerned about it than in previous cycles because the economy is growing at a slow pace and inflation remains below the Fed's 2% target. As a result, we think there is a reasonable probability that the Fed will not raise rates as high or as quickly as is widely forecast. We believe that the Maryland Short-Term Tax-Free Fund is attractive for investors with a long-term focus who want more tax-free income than a money fund and are willing to accept modest 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. As always, we are on the lookout for attractively valued bonds issued by municipalities with good long-term fundamentals, an investment strategy that we believe will continue to serve our investors well.