U.S. investment-grade bond returns were mostly flat in the third quarter, as price gains in September offset earlier losses. Longer-term Treasury interest rates rose to two-year highs through early September. However, bond prices rallied and yields retreated late in the quarter as the Fed unexpectedly delayed a widely expected reduction of asset purchases in September and a federal government shutdown and debt ceiling impasse appeared likely. In the municipal market, long-term bond prices fell as 30-year muni yields rose for the quarter but finished below their highest levels. Short- and intermediate-term securities performed better than long-term issues as yields declined for the quarter. Lower-quality municipals in the investment-grade universe fared worse than higher-quality issues. High yield munis also struggled.
The California Tax-Free Bond Fund returned −0.21% in the quarter compared with −0.74% for the Lipper California Municipal Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned −2.32% versus −2.98% for the Lipper California Municipal Debt Funds Average. The fund's average annual total returns were −2.32%, 5.93%, and 4.20% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.50% as of its fiscal year ended February 28, 2013.
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We have a positive outlook on California's state government and agencies. An improving economy and conservative fiscal leadership under Governor Jerry Brown have greatly improved California's finances. We added to California general obligation debt during the quarter, and will continue to seek opportunities to do so. From a sector perspective, our most significant overweight is health care. Hospitals comprised most of this position, but we also maintained a modest allocation to select life care names. We also maintained overweights to select airport and seaport names, as well as prepaid gas. Airports and seaports provided exposure to revenues from essential service transportation hubs, while the prepaid gas securities enhanced the portfolio's yield. In terms of credit quality, our biggest absolute allocation and relative overweight is in A rated bonds. We remain overweight to longer-maturity bonds in order to capture the more attractive yields that accompany longer-maturity structures; however, we have trimmed this overweight to make our positioning more neutral against the yield curve.
This year's decline in municipal bond prices has rattled some investors, but it does not represent a fundamental change in the nature, quality, or risk characteristics of the market. We continue to believe that it is a high-quality market, with good investment opportunities for those with a long-term focus and attractive tax-free income in what is still a very low interest rate environment. Recent underperformance of long-term munis makes their nominal and tax-equivalent yields even more attractive, but if market outflows persist and rates resume rising, further price declines are likely. Given the potential for rates to rise further, we will remain careful with any investment shift that might materially increase our portfolio's interest rate sensitivity. Irrespective of interest rate movements, the credit and economic environment for municipalities is likely to remain challenging. Cutbacks in state support and persistent downward pressure on property tax revenues could keep local municipal issuers vulnerable. If the economy weakens, municipalities would face even tougher challenges.