New York municipal bonds advanced in the fourth quarter despite a rise in long-term Treasury interest rates. Late in the fall Congress agreed on a two-year budget deal that could add slightly to 2014 economic growth. More significantly, the Federal Reserve announced in mid-December that it will begin to curtail its $85 billion monthly asset purchases in January. Long-term municipal bond yields rose, but not as much as Treasuries, while shorter-term yields declined or were flat. Lower-quality municipals in the investment-grade universe fared worse than higher-quality tiers.
The New York Tax-Free Bond Fund returned 0.41% in the quarter compared with 0.03% for the Lipper New York Municipal Debt Funds Average. For the 12 months ended December 31, 2013, the fund returned −3.81% versus −5.22% for the Lipper New York Municipal Debt Funds Average. The fund's average annual total returns were −3.81%, 5.96%, and 3.82% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.49% as of its fiscal year ended February 28, 2013.
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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 bulk of our holdings are in credits related to New York City, where we see the most value among issuers, though we are modestly cautious amid the transition to new city leadership. We have a significant overweight in the education sector, and we are strongly overweight to the hospital sector. The fund maintains a high-quality portfolio relative to both peers and our benchmark. We continued to reduce our exposure to troubled Puerto Rico bonds, where we have minimal holdings.
The decline in municipal bond prices in 2013 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 underperformance of long-term munis makes their nominal and taxable-equivalent yields more appealing, but if market outflows persist and rates resume rising, 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.