The fourth quarter brought higher interest rates driven by tax reform legislation and an increase in the federal funds rate. Fixed income investors also looked to guidance from the Federal Reserve (Fed), which expects to raise interest rates three times in 2018 despite persistently low inflation. Two- and three-year Treasury yields finished higher by 0.40% and 0.35%, respectively. The tax exempt municipal bond market saw higher yields as well.
New issue municipal bond volume increased dramatically in December as issuers rushed deals to market ahead of the tax reform to come in 2018. This put pressure on a market that typically sees higher volatility in the fourth quarter due to tax loss harvesting and portfolio rebalancing prior to year-end. The result was two- and three-year Municipal Market Data (MMD) yields finished higher for the quarter by 0.56% and 0.52%, respectively.
The Fund returned -0.15%, while the benchmark returned -0.19% for the quarter. The Fund's negative total return was a result of a broad increase in interest rates, especially in the municipal sector. The Fund maintained its short duration versus the benchmark, ending the quarter at 0.89 years. The Fund sold taxable securities and purchased municipal variable rate demand notes and front end tax exempt securities over the quarter. A lower duration versus the benchmark and an allocation to floating rate securities afforded the Fund less sensitivity to rising interest rates. Corporate securities performed well versus an all municipal benchmark as credit spreads tightened modestly.
Not FDIC insured | May lose value | No bank guarantee
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