Tax-free municipal bonds produced strong gains in the first quarter and outperformed taxable bonds. Longer-term Treasury yields declined from the two-and-a-half-year highs reached at the end of 2013, as weakness in emerging markets and geopolitical tensions over Ukraine prompted some risk aversion. The yield decline occurred despite the onset of the Federal Reserve's measured tapering of its asset purchases. In the municipal market, long-term interest rates also declined, but short-term yields were little changed. Longer-term and lower-quality issues outperformed.
The California Tax-Free Bond Fund returned 4.23% in the quarter compared with 4.49% for the Lipper California Municipal Debt Funds Average. For the 12 months ended March 31, 2014, the fund returned 0.68% versus 0.05% for the Lipper California Municipal Debt Funds Average. The fund's average annual total returns were 0.68%, 6.56%, and 4.39% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.50% as of its fiscal year ended February 28, 2013.
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Given our positive outlook on California's state government and its agencies due to the improving economy and prudent fiscal policies under Governor Jerry Brown, we have increased our allocation to California general obligation debt as valuations warranted. Health care is our largest overweight sector. Hospitals account for most of our holdings, though we have a small allocation to life care names. We are overweight in select air and seaport names, which provide exposure to revenues from transportation and shipping hubs, as well as in prepaid gas securities for their added yield. From a credit quality perspective, our biggest absolute allocation and relative overweight is in A rated bonds. We remain overweight in longer-maturity bonds, particularly those with maturities of 20 years and longer, for their more attractive yields. Trading was limited over the quarter due to a low level of new issues. Our sector allocations remained broadly unchanged. We added to education and hospital credits.
We believe that the municipal bond market is a high-quality market with good opportunities for those with a long-term focus and attractive tax-free income, particularly for those in the highest tax brackets, in what is still a very low interest rate environment. While strong first-quarter performance on the heels of last year's muni market downturn is encouraging, price declines are likely if cash outflows resume, if interest rates start rising again, or if there are additional negative credit headlines. We will remain careful with any investment shift that might materially increase our portfolio's interest rate sensitivity. However, we believe further rate increases will be at a more measured pace than what we witnessed in the spring and summer of 2013. Irrespective of interest rate movements, the credit and economic environment for municipalities continues to improve, aided by modest economic growth and improving tax revenues.