Tax-free municipal bonds edged lower in the second quarter of 2015 but held up better than taxable bonds. Munis fell along with Treasuries in response to rising long-term interest rates, a strengthening economy, and concerns that the Federal Reserve would begin raising short-term interest rates later 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, fell sharply after its governor said that the commonwealth's debt was "not payable."
The California Tax-Free Bond Fund returned −1.12% in the quarter compared with −1.21% for the Lipper California Municipal Debt Funds Average. For the 12 months ended June 30, 2015, the fund returned 3.74% versus 3.83% for the Lipper California Municipal Debt Funds Average. The fund's average annual total returns were 3.74%, 5.25%, and 4.52% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 0.49% as of its fiscal year ended February 28, 2015.
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California's strengthening economy and conservative fiscal policies under Governor Jerry Brown have greatly improved the state government's finances. Health care remains a significant allocation in the fund, and we also maintain allocations to select air and seaport names. We continue to favor revenue bonds over general obligation (GO) debt, a reflection of our longer-term concerns regarding pension and health care liabilities. While we have a positive outlook for the State of California's GO debt and the state is the fund's largest guarantor, we are underweight local GO debt due to concerns about longer-term fiscal challenges facing many localities. Credit quality in California continues to strengthen as the improving economy benefits many municipal issuers.
We believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. As the Fed prepares to tighten monetary policy, we are mindful that rising rates would likely weaken the appetite for bonds with higher interest rate risk. However, the transition to higher rates may not be as painful as some fear. While we believe that many states deserve high credit ratings and will be able to continue servicing their debts, we have longer-term concerns about significant funding shortfalls for pensions and OPEB obligations in some jurisdictions. Although few large plans are at risk of insolvency in the near term, the magnitude of unfunded liabilities is becoming more conspicuous in a few states. Ultimately, we believe that 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.