Tax-free municipal bonds produced strong returns in the third quarter, outperforming taxable bonds. Munis were one of the best-performing asset classes to date in 2015 as higher-risk assets fell sharply in recent months in response to China's economic deceleration and tumbling commodity prices. Prices of U.S. Treasury and municipal bonds rallied and yields fell on the news that the Federal Reserve opted not to increase the federal funds rate at its September policy meeting as adverse international developments offset an improving jobs market. Longer-maturity municipals generally outperformed shorter-maturity bonds as the municipal yield curve flattened over the period.
The New York Tax-Free Bond Fund returned 1.74% in the quarter compared with 1.53% for the Lipper New York Municipal Debt Funds Average. For the 12 months ended September 30, 2015, the fund returned 3.48% versus 2.97% for the Lipper New York Municipal Debt Funds Average. The fund's average annual total returns were 3.48%, 4.26%, and 4.36% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. 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.
New York is the second most heavily indebted state, according to Moody's. Most of New York's debt is appropriation-backed, meaning that the legislature must approve debt service payments on these obligations annually and has no legal requirement to continue paying these expenses. We favor revenue bonds over general obligation debt in light of our ongoing concerns that many municipalities will face challenges related to increased pension and retiree health care liabilities. Education and health care are significant allocations in the fund. The fund's duration-a gauge of its sensitivity to interest rate changes-was close to that of the benchmark Barclays index. We maintained an overweight to bonds with maturities of 15 years and longer relative to the index for the added yield offered by longer-dated bonds and due to our expectations for higher short-term rates as the Fed draws closer to tightening 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. As the Fed prepares to tighten monetary policy, we are mindful that rising rates would likely weaken demand for bonds with higher interest rate risk. However, with the Fed likely to act cautiously, the transition to higher rates may not be as painful as some fear. We believe that many states deserve high credit ratings and will be able to continue servicing their debts, but we have longer-term concerns about funding shortfalls for pensions and other retiree obligations in some jurisdictions. Though few large plans are at risk of insolvency in the near term, the magnitude of unfunded liabilities is becoming more conspicuous in a few states. 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.