Tax-free municipal bonds produced positive returns but trailed taxable bonds in the first quarter of 2016. New York bonds performed in line with the national index. Limited supply and solid demand have created a strong technical environment for munis, despite the Fed's December rate hike and the potential for additional rate increases this year. According to Bond Buyer data, bond issuance increased in New York compared with the same period in 2015, and the state was the third-largest issuer of muni debt overall. Nationally, year-over-year issuance has been declining due to a sharp drop in refinancing activity, while muni market inflows have been strong. In terms of sector performance, revenue bonds generally outperformed state and local general obligations (GOs).
The New York Tax-Free Bond Fund returned 1.56% in the quarter compared with 1.53% for the Lipper New York Municipal Debt Funds Average. For the 12 months ended March 31, 2016, the fund returned 4.15% versus 3.66% for the Lipper New York Municipal Debt Funds Average. The fund's average annual total returns were 4.15%, 5.85%, and 4.61% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.49% as of its fiscal year ended February 28, 2015.
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.
We continue to favor revenue bonds over GO debt in light of our long-held concerns that many municipalities will face challenges related to increased pension and health care liabilities. Education, health care, and transportation remain our largest sector positions. As for yield curve positioning, we have a relative overweight in bonds with maturities of 20 years and longer, which has aided returns over the longer term. Our overweight to longer-maturity bonds provides added yield, and we believe this positioning will serve us well going forward due to our expectations for higher short-term rates as the Fed slowly tightens monetary policy.
We believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. While fundamentals are sound overall and technical support should persist, investors should expect modest returns in 2016, perhaps just earning the coupon income offset somewhat by modest declines in principal values. Munis should be less susceptible to rising rates than Treasuries given their attractive tax-equivalent yields and the steady demand for tax-exempt income. Ultimately, we believe that 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.