High-quality, short-term Maryland municipal bonds generated positive returns that were more modest than the returns of longer-term municipals in the second quarter. Diminishing yields on short-term bonds is an ongoing issue and is not unique to this fund or our state. The T. Rowe Price economics team believes that the Federal Reserve will wind down its asset purchase program by the end of 2014 and that short-term interest rate increases are likely to begin in mid- to late 2015. The municipal yield curve continued to flatten during the second quarter: Long-term yields declined, while short-term rates remained anchored by the Fed's commitment to keep them low "for a considerable time" after it stops purchasing securities.
The Maryland Short-Term Tax-Free Bond Fund returned 0.54% in the quarter compared with 0.40% for the Lipper Short Municipal Debt Funds Average. For the 12 months ended June 30, 2014, the fund returned 1.41% versus 1.23% for the Lipper Short Municipal Debt Funds Average. The fund's average annual total returns were 1.41%, 1.09%, and 2.02% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 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 also have a large absolute weight, and relative overweight, to revenue-backed debt, which is offset by a below-benchmark allocation to prerefunded bonds. 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 modest exposure in out-of-benchmark intermediate maturities to capture the more attractive yields available in longer, five-year securities. During the quarter, we increased our allocation to health care holdings and reduced our exposure to education as bonds matured.
Yields on short-term Maryland bonds are likely to remain at very low levels for some time. However, short-term rates could start to move higher in the second half of this year as the market starts to anticipate Fed tightening in 2015. 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. As always, we are on the lookout for attractively valued issues with good fundamentals-an investment strategy that has served our investors well in the past.