Tax-free municipal bonds produced solid gains in the second quarter and outperformed taxable bonds. Longer-term Treasury yields extended their first-quarter decline amid concerns about a surprise first-quarter U.S. economic contraction, continued tensions with Russia over Ukraine, and growing instability in Iraq. The yield decline occurred despite solid employment gains and the Federal Reserve's continued tapering of its monthly asset purchases. Intermediate- and long-term municipal rates declined more than comparable Treasury yields, but short-term yields in both markets were little changed. Longer-term and lower-quality municipals outperformed shorter-term and higher-quality issues, respectively.
The California Tax-Free Bond Fund returned 3.01% in the quarter compared with 3.12% for the Lipper California Municipal Debt Funds Average. For the 12 months ended June 30, 2014, the fund returned 7.80% versus 7.40% for the Lipper California Municipal Debt Funds Average. The fund's average annual total returns were 7.80%, 6.52%, and 4.94% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.50% as of its fiscal year ended February 28, 2014.
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An improving economy and conservative fiscal leadership under Governor Jerry Brown have greatly improved the finances of California state government, evidenced by Moody's June upgrade of the state's credit rating to Aa3. Health care is our largest overweight sector. Hospitals account for most of our holdings, though we have an allocation to life care names. We maintain allocations to select airport and seaport names, which provide exposure to revenues from transportation and shipping hubs, as well as to prepaid gas securities for their added yield. From a credit quality perspective, our biggest absolute allocation and relative overweight is A rated bonds. We remain overweight in longer-maturity bonds, particularly those with maturities of 20 years and longer, for their more attractive yields. During the quarter, we strove to add more yield by purchasing bonds backed by life care facilities.
We still believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. We are concerned about the potential for rising rates, but believe that further rate increases will occur at a more measured pace than what we witnessed in 2013. We also believe that short- and intermediate-term rates could be more volatile than long-term rates as we approach the first Fed rate hike. Detroit and Puerto Rico have generated negative headlines over the past year and could affect the muni market in the near term. Ultimately, we believe that our independent credit research is our greatest strength and will remain an asset for our investors as we navigate the current market.