New York municipal bonds produced strong gains in the third quarter that outperformed the broad taxable bond market. Municipal debt moved roughly in tandem with longer-term Treasuries. Interest rates declined despite the Federal Reserve's tapering of its asset purchases, due to increased geopolitical risks and concerns about sluggish global economic growth. Steady demand for munis and generally limited supply were also favorable factors. Short- and intermediate-term Treasury note yields increased as investors began to anticipate the start of Fed rate hikes, which we expect will occur around mid-2015. Shorter-term municipal yields rose to a lesser extent, however. Long-term and lower-quality municipals outperformed short-term and higher-quality issues, respectively, as investors sought securities with a yield advantage.
The New York Tax-Free Bond Fund returned 1.98% in the quarter compared with 1.93% for the Lipper New York Municipal Debt Funds Average. For the 12 months ended September 30, 2014, the fund returned 9.10% versus 8.83% for the Lipper New York Municipal Debt Funds Average. The fund's average annual total returns were 9.10%, 4.70%, and 4.41% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.50% as of its fiscal year ended February 28, 2014.
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We continue to favor revenue bonds, reflecting our longer-term concern that state and local governments will face fiscal challenges related to long-term pension and other post-employment benefit liabilities. The education sector continues to be our largest allocation, followed by transportation and health care, which together represent over 50% of the portfolio. We have no exposure to troubled Puerto Rico bonds, and modestly increased our exposure to the transportation sector as well as local general obligations. Over the period, we increased the fund's exposure to AAA rated holdings and increased our small allocation to nonrated securities. The fund remains overweight to debt rated A and lower.
We believe that New York municipal bonds offer good opportunities for long-term investors seeking tax-free income. However, we acknowledge that it has become somewhat challenging to find attractive yields outside of the distressed segments of the market. While we are concerned about the potential for rising rates, we believe that further rate increases will be at a more measured pace than what we witnessed last year. Ultimately, 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.