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, as global markets and other higher-risk assets have fallen sharply in recent months in response to China's economic deceleration and tumbling commodity prices. Both U.S. Treasury and municipal bonds rallied and yields fell on the news that the Federal Reserve's policymaking committee opted not to increase the benchmark short-term interest rate at its mid-September meeting, as adverse international developments offset ongoing improvements in the U.S. labor market. Longer-maturity municipals generally outperformed shorter-maturity bonds as the municipal yield curve flattened over the period.
The Virginia Tax-Free Bond Fund returned 1.53% in the quarter compared with 1.39% for the Lipper Virginia Municipal Debt Funds Average. For the 12 months ended September 30, 2015, the fund returned 3.20% versus 1.69% for the Lipper Virginia Municipal Debt Funds Average. The fund's average annual total returns were 3.20%, 4.02%, and 4.37% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.47% as of its fiscal year ended February 28, 2015.
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The Virginia Tax-Free Bond Fund continued to focus on bonds supported by revenues. We favor the relative security of specific claims on revenues versus the generic pledges of taxing power associated with general obligation issues, and revenue sectors typically also provide more yield. We have a particular emphasis on health care and transportation bonds. We have no exposure to the debt of Puerto Rico, a position we expect to maintain for the foreseeable future. As always, we will continue to focus on the best long-term prospects led by our fundamental, research-driven investment process.
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.