New York municipal bonds declined in the third quarter of 2013 as interest rates rose across all fixed income markets. Longer-term Treasury interest rates rose to two-year highs through early September. However, bond prices rallied and yields retreated in the final weeks of the quarter, as the Fed surprisingly delayed a widely-expected mid-September reduction of asset purchases and as an October federal government shutdown and debt ceiling showdown appeared likely. Long-term municipal bond prices fell, as 30-year muni yields rose for the quarter but finished below their highest levels. Short- and intermediate-term securities performed better than long-term issues, as yields declined for the quarter. Lower-quality municipals in the investment-grade universe fared worse than higher-quality issues. High yield munis also struggled.
The New York Tax-Free Bond Fund returned −0.41% in the quarter compared with −1.50% for the Lipper New York Municipal Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned −3.61% versus −4.61% for the Lipper New York Municipal Debt Funds Average. The fund's average annual total returns were −3.61%, 5.52%, and 3.92% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.49% as of its fiscal year ended February 28, 2013.
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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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The New York Tax-Free Bond Fund emphasizes longer-maturity bonds, which we believe continue to offer the greatest value. Relative to the Barclays Municipal Bond Index, the fund is significantly overweight in bonds with maturities greater than 15 years, allowing us to capture the incremental yield available in longer bonds. The fund's holdings are predominantly in credits related to New York City, where we see the most value among issuers. We have a significant overweight in the education sector, and we are also strongly overweight to the hospital sector. The fund maintains a high-quality portfolio relative to both peers and our benchmark, and we have extremely limited exposure to Puerto Rico and tobacco credits.
The decline in municipal bond prices has rattled some investors, but it does not represent a fundamental change in the nature, quality, or risk characteristics of the market. We continue to believe that New York municipal bonds offer good investment opportunities for investors with a long-term focus and attractive tax-free income in what is still a very low interest rate environment. The recent underperformance of long-term munis makes their nominal and tax-equivalent yields even more compelling, but if rates continue rising unabated and market outflows persist, further price declines are likely. As always, we are on the lookout for attractively valued bonds issued by municipalities with good fundamentals, an investment strategy that has served our investors well in the past.