Tax-free municipal bonds produced gains in the first quarter but lagged taxable bonds. Munis benefited from a rally in Treasuries, as longer-term interest rates declined amid slowing U.S. economic growth, low inflation, attractive yields relative to sovereign debt in developed non-U.S. countries, and a belief that the Federal Reserve will not raise short-term interest rates hastily or rapidly. In the muni market, lower-quality, longer-maturity revenue bonds generally outperformed higher-quality, short-maturity issues and general obligation debt, as investors continued to seek attractive yields in the ongoing low-rate environment.
The Tax-Free Income Fund returned 1.20% in the quarter compared with 1.01% for the Barclays Municipal Bond Index. For the 12 months ended March 31, 2015, the fund returned 7.69% versus 6.62% for the Barclays Municipal Bond Index. The fund's average annual total returns were 7.69%, 5.33%, and 4.84% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.52% 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.
The fund's duration and weighted average maturity were little changed during the quarter. We emphasized longer-term securities to pick up the significant additional yield offered by those bonds. There was also very little change to the fund's overall credit quality profile. We believe our A and BBB rated holdings offer greater value than their higher-quality counterparts. In terms of sector performance, revenue bonds modestly outperformed local and state general obligations (GOs). Our bias for revenue bonds over GOs continues to be one of our investment themes, reflecting our uneasiness related to escalating pension and health care liabilities.
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 later in 2015. 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. In addition, while we believe that many states deserve high credit ratings and will be able to continue servicing their debts, we have some longer-term concerns about significant funding shortfalls for pensions and other post-employment benefit obligations in some jurisdictions. Ultimately, we believe T. Rowe Price's independent credit research is our greatest strength and will remain an asset for our investors.