New York municipal bonds produced good returns in the fourth quarter of 2014, outperforming taxable bonds for the year and capping a very strong year in absolute terms. Municipal debt prices rose along with long-term Treasuries, whose interest rates continued falling-despite strong U.S. economic growth and the conclusion of the Federal Reserve's monthly asset purchases in October, because of global macroeconomic considerations, such as general economic weakness and falling bond yields in Europe and Japan. Demand for munis was strong, helping the market absorb an uptick in issuance later in the year as municipalities took advantage of low interest rates.
The New York Tax-Free Bond Fund returned 1.54% in the quarter compared with 1.46% for the Lipper New York Municipal Debt Funds Average. For the 12 months ended December 31, 2014, the fund returned 10.33% versus 10.45% for the Lipper New York Municipal Debt Funds Average. The fund's average annual total returns were 10.33%, 5.17%, and 4.45% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.50% 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.
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, special tax, and health care, which together represent about 65% of the portfolio. We have no exposure to troubled Puerto Rico bonds, and we modestly increased our exposure to the transportation sector as well as local general obligations. Over the period, we decreased the funds exposure to AAA rated holdings and increased the fund's exposure to AA rated holdings as well as our small allocation to nonrated securities. The fund remains overweight to debt rated A and lower.
While yields remain low, we continue to believe that the New York municipal bond market offers good opportunities for long-term investors seeking tax-free income. We remain concerned about the potential for rising rates and believe that short- and intermediate-term rates could continue to increase as we approach the first Fed rate hike. As such, our portfolios, while remaining conservative in their duration positioning, continue to underweight short-term securities in favor of longer-maturity bonds. In addition, we continue to have a strong bias toward revenue bonds that not only provide incremental yield over state and local GO debt, but also are largely insulated from the pension risk that we believe will become increasingly recognized by the market over time. Ultimately, we believe 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.