Geopolitical risk, hurricanes and ongoing gridlock in Washington made headlines in the third quarter. For these reasons, U.S. Treasury trading was choppy but interest rates ended higher after a September sell-off. Front-end interest rates finished higher by 0.10% and 0.08% for two- and three-year Treasuries, respectively. As expected, the Federal Reserve (Fed) left its benchmark short-term rate unchanged during the third quarter, citing persistently low inflation alongside solid employment gains. However, Fed Chair Yellen did outline the Fed’s plans to begin balance sheet normalization in October. This news was well telegraphed and spurred little market reaction.
The municipal market continues to react to very strong demand for front end bonds on lack of supply compared to previous years. Both two and three year MMD muni yields finished lower by 0.06% for the quarter.
The Fund posted a total return of 0.24% in the third quarter. We added duration and corresponding interest rate sensitivity over the quarter while maintaining a below-benchmark duration, moving from 0.90 year to 1.07 years at quarter end. The Fund purchased municipal variable rate demand notes and one-year notes, along with two- and three-year municipals, in order to extend duration toward one year. Corporate securities purchased at an attractive after-tax yield relative to tax-exempt securities also added value versus the benchmark, as credit spreads continued to tighten.
Not FDIC insured | May lose value | No bank guarantee
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