Tax-free municipal bonds outperformed taxable bonds in the fourth quarter. Intermediate- and long-term Treasury interest rates increased as the economy strengthened and Congress passed a two-year budget deal that could add slightly to 2014 economic growth. The Federal Reserve announced in mid-December that it will begin to curtail its $85 billion monthly asset purchases in January. The 10-year Treasury note yield rose to 3.03% by the end of 2013-the highest level in about two-and-a-half years. In the municipal market, long-term interest rates increased, but not as much as Treasury yields, while shorter-term yields declined or were flat.
The California Tax-Free Bond Fund returned 0.62% in the quarter compared with 0.45% for the Lipper California Municipal Debt Funds Average. For the 12 months ended December 31, 2013, the fund returned −2.76% versus −3.67% for the Lipper California Municipal Debt Funds Average. The fund's average annual total returns were −2.76%, 6.59%, and 4.11% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.50% as of its fiscal year ended February 28, 2013.
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An expanding economy and conservative fiscal policies under Governor Jerry Brown have greatly improved California's finances. We added to California general obligation (GO) debt and continue to seek opportunities to do so. Our largest overweight is in the health care sector, with hospitals accounting for most of our holdings. We are overweight in select airport/seaport names, which provide exposure to revenues from transportation and shipping hubs, as well as in prepaid gas securities for their added yield. In terms of credit quality, 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 the more attractive yields they offer. Our trading activity was limited over the quarter. We modestly trimmed our education credits, while slightly increasing our exposure to industrial revenue and GO debt.
The decline in municipal bond prices in 2013 has rattled some investors but does not represent a fundamental change in the nature, quality, or risk characteristics of the market. The underperformance of long-term munis in 2013 makes their nominal and taxable-equivalent yields more attractive, but if market outflows persist and rates resume rising, further price declines are likely. State and local government liabilities such as pension benefits and health care costs are a growing concern. Most municipal governments are maintaining balanced budgets, but fewer municipalities have meaningfully addressed these longer-term liabilities. States will need to continue these efforts on their own, as a federal bailout of state and local governments without some losses to bondholders seems unlikely. Even as interest rates return to more normal levels, bonds will remain an important asset class. We expect to continue finding good investment opportunities for long-term oriented, income-seeking investors.