Tax-free municipal bonds rose in the fourth quarter of 2014, outperforming taxable bonds for the year. Municipal debt prices rose along with long-term Treasuries, whose interest rates continued falling due to uneven global growth and declining bond yields in Europe and Japan. Low U.S. inflation underscored by a collapse in oil prices also helped drive favorable fixed income returns. Strong demand for munis helped the market absorb an uptick in issuance later in the year as municipalities took advantage of low interest rates. Long-term municipals exceeded short-term issues as shorter-term rates rose incrementally in anticipation of potential Fed rate hikes in 2015. Lower-quality munis delivered strong returns for the quarter and the full year. Ultimately, the combination of long maturities and a lower credit-quality profile was the best combination to have during 2014.
The California Tax-Free Bond Fund returned 1.51% in the quarter compared with 1.65% for the Lipper California Municipal Debt Funds Average. For the 12 months ended December 31, 2014, the fund returned 11.41% versus 11.88% for the Lipper California Municipal Debt Funds Average. The fund's average annual total returns were 11.41%, 5.95%, and 4.80% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.50% as of its fiscal year ended February 28, 2014.
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California's strengthening economy and conservative fiscal policies under Governor Jerry Brown have greatly improved the state government's finances. The fund has experienced sizable inflows this year, and we continue to seek solid cash flows in California given the strong demand for tax-exempt yields in a relatively high-tax state. Health care remains a significant overweight, with hospitals accounting for most of our holdings in this sector. We also maintain allocations to select air and seaport names, which provide exposure to revenues from transportation and shipping hubs. We continue to underweight local general obligation debt, where we remain highly selective due to the fiscal challenges facing many California localities. We tend to avoid high yield names in the state (for example, toll roads) given their fundamental weakness; however, we continue to seek select lower-quality opportunities offering yield.
We continue to believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. We remain concerned about the potential for rising rates and believe that short- and intermediate-term rates could continue to increase as we approach the first Fed rate hike. While remaining conservative in our duration positioning, we continue to underweight short-term securities in favor of longer-maturity bonds. We continue to have a strong bias toward revenue bonds that not only provide incremental yield over state and local general obligation debt, but also are largely insulated from pension risk. 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.