Long-term municipal bond prices fell and yields rose during the third quarter, although the 30-year yield finished below its highest level for the period. Short- and intermediate-term securities performed better than long-term issues as yields declined. Lower-quality municipals in the investment-grade universe fared worse than higher-quality issues, and high yield munis also struggled. The U.S. economy grew at a moderate 2.5% pace in the second quarter of 2013, overcoming the headwinds stemming from higher tax rates and federal spending reductions that took effect earlier in the year.
The Tax-Free Income Fund returned −0.62% in the quarter compared with −0.19% for the Barclays Municipal Bond Index and −0.78% for the Lipper General & Insured Municipal Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned −3.16% versus −2.21% for the Barclays Municipal Bond Index and −3.44% for the Lipper General & Insured Municipal Debt Funds Average. The fund's average annual total returns were −3.16%, 5.85%, and 4.21% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.51% as of its fiscal year ended February 28, 2013.
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Long-term yields increased during the quarter, which weighed on fund performance due to our overweight in longer-maturity bonds. The fund's relatively long duration (a measure of the portfolio's sensitivity to fluctuating interest rates) also detracted from the fund's return. However, the structure of some of our bond holdings was beneficial as rates ended the quarter modestly higher. Although our overweight in longer-term bonds was negative, our premium-priced callable bonds exhibited less interest rate volatility than would otherwise have been the case. Bonds issued by various entities for the Commonwealth of Puerto Rico, which are triple-tax-exempt in all 50 states, drastically declined in valuation, as concerns mounted about the island's long-running fiscal challenges and high debt burdens. We have been decreasing our Puerto Rico holdings over the past two years, which helped fund results.
The decline in municipal bond prices has rattled some investors, but we do not think it represents a fundamental change in the nature, quality, or risk characteristics of the market. We continue to believe it is a high-quality market, with good investment opportunities for those with a long-term focus looking for attractive tax-free income, particularly for those in the highest tax brackets, in what is still a very low interest rate environment. The recent underperformance of long-term munis makes their nominal and tax-equivalent yields even more attractive, but if market outflows persist and rates resume rising, further price declines are likely. Given the potential for rates to rise further, we are careful about any investment shift that might materially increase the portfolio's interest rate sensitivity. That said, we believe future rate increases will be more modest than those we have seen in recent months.