Tax-free municipal bonds edged lower in the second quarter of 2015 but held up better than taxable bonds. Munis fell alongside Treasuries in response to rising long-term interest rates, a strengthening economy, and some concerns that the Federal Reserve-which kept short-term rates steady during the quarter-would begin raising interest rates sometime in 2015. However, munis held up better than U.S. government bonds amid light issuance and solid demand for tax-free issues. In the muni market, lower-quality and longer-maturity bonds lagged higher-quality and shorter-term issues, respectively. Late in the quarter, bonds issued by Puerto Rico, a major muni issuer but one that we have long avoided, fell sharply following an acknowledgement by its governor that the commonwealth's debt was "not payable."
The Virginia Tax-Free Bond Fund returned −0.87% in the quarter compared with −1.40% for the Lipper Virginia Municipal Debt Funds Average. For the 12 months ended June 30, 2015, the fund returned 3.28% versus 2.08% for the Lipper Virginia Municipal Debt Funds Average. The fund's average annual total returns were 3.28%, 4.44%, and 4.20% for the 1-, 5-, and 10-year periods, respectively, as of June 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 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. 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.