Tax-free municipal bonds produced strong returns in the third quarter, outperforming taxable bonds. Munis are one of the best-performing asset classes year-to-date, remaining relatively well insulated against the pressures that higher-risk assets have faced. Tax-free bonds rallied and yields fell after the Federal Reserve opted not to increase short-term rates at its September meeting, as adverse international developments offset ongoing improvements in the labor market. Municipal bond issuance slowed later in the quarter, but totals through the first nine months of the year were ahead of 2015's pace as muni issuers have been taking advantage of low borrowing costs to refinance older, higher-cost debt. Longer-maturity municipals generally outperformed shorter-maturity issues.
The Tax-Free Income Fund returned 1.44% in the quarter compared with 1.65% for the Barclays Municipal Bond Index and 1.43% for the Lipper General & Insured Municipal Debt Funds Average. For the 12 months ended September 30, 2015, the fund returned 3.14% versus 3.16% for the Barclays Municipal Bond Index and 2.66% for the Lipper General & Insured Municipal Debt Funds Average. The fund's average annual total returns were 3.14%, 4.32%, and 4.57% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.51% 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.
Our security selection within the revenue-backed debt sector contributed, particularly our holdings in the health care and leasing subsectors. We prefer revenue bonds in general because they offer the relative security of specific claims on revenues versus the generic pledges of taxing power associated with general obligation bonds. We were overweight longer-maturity bonds relative to the benchmark. This positioning was beneficial as the yields of longer-maturity bonds decreased. As always, we focus on finding attractively valued bonds issued by municipalities with good long-term fundamentals.
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, there could be hurdles in the months ahead. In particular, with the Fed preparing to tighten monetary policy, we are mindful that rising rates would likely weaken the appetite 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. 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.