Tax-free municipal bonds produced solid gains in the second quarter. Longer-term Treasury yields extended their first-quarter decline amid concerns about a sharp weather-related first-quarter U.S. economic contraction, lingering geopolitical tensions with Russia over Ukraine, and a sharp increase in sectarian violence in Iraq. Intermediate- and long-term municipal rates declined more than comparable Treasury yields, but short-term yields in both markets were little changed. Longer-term and lower-quality municipals outperformed shorter-term and higher-quality issues.
The Tax-Free Income Fund returned 2.78% in the quarter compared with 2.59% for the Barclays Municipal Bond Index and 2.72% for the Lipper General & Insured Municipal Debt Funds Average. For the 12 months ended June 30, 2014, the fund returned 6.64% versus 6.14% for the Barclays Municipal Bond Index and 6.08% for the Lipper General & Insured Municipal Debt Funds Average. The fund's average annual total returns were 6.64%, 6.06%, and 4.85% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.52% as of its fiscal year ended February 28, 2014.
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There were only minimal changes in the fund's sector holdings, with the transportation sector (the fund's largest) increasing slightly. Borrowing for transportation projects has been elevated in the past few years to meet the need for maintenance and capital improvements. Health care is the fund's second-largest sector, and we have found value there through credit research and credit selection. The sector outperformed during the period, which can be partly attributed to a decline in overall issuance. In general, fund positions that lagged during the period were shorter-maturity, high-quality bonds, including prerefunded bonds. Our top performers were on the opposite side of the spectrum: lower-quality securities with long maturities and long durations.
We remain concerned about the potential for rising rates, but we believe that further rate increases will be at a more measured pace than what we witnessed in 2013, in part because the economy's weakness in the first quarter of 2014 is tempering full-year growth expectations. We also believe that short- and intermediate-term rates could be more volatile than long-term rates as we approach the first Fed rate hike. When making investment decisions, we consider the forward-looking projections of rates and yield curves by our interest rate strategy and economics teams, and we will continue to be careful with any portfolio changes that might materially increase our portfolio's interest rate sensitivity.