Interest rates were well anchored in the third quarter, with only modest increases across the yield curve. The U.S. Treasury curve flattened slightly as U.S. Federal Reserve (Fed) actions drove short rates slightly higher, while stagnant inflation readings restrained longer-term rates. The Fed announced detailed plans for a reduction of its balance sheet, and other developed market central banks voiced their intentions to reduce monetary policy accommodation. A strong seasonal supply/demand environment helped the municipal market to outpace Treasuries.
The Short-Intermediate Tax-Exempt Fund returned 0.29% during the period, versus 0.53% for the Bloomberg Barclays 1-5 Year Blend Municipal Bond Index.
During the period, we added to the Fund’s allocation in one-year bonds in order to capitalize on their elevated yields. Conversely, we reduced exposure to the three- to five-year range, as we feel that this portion of the curve has been slow to adjust to Treasury yield levels and Fed actions. We also boosted the portfolio’s weighting in the six- to nine-year range. While we extended duration marginally late in the period, we maintained a conservative approach on the belief that increased supply could create buying opportunities in the fourth quarter. Additionally, we retained an overweight in higher quality issues, as we believe that the recent outperformance of lower-rated bonds primarily reflected strong supply/demand conditions rather than improving credit fundamentals. The Fund is well diversified, with over 90% invested in the top two rating categories, and no positions in Puerto Rico.
Holdings are subject to change and current and future portfolio holdings are subject to risk.
Not FDIC insured | May lose value | No bank guarantee
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