Tax reform discussions dominated the market throughout the fourth quarter. December issuance totaled $64 billion, an all-time record, as issuers rushed to market ahead of tax law changes affecting municipal issuers. In 2018 the tax exemption for advance refunding debt will be eliminated. This led to a rush of tax-free refinancing in December. Supply was both priced to sell and in a sense borrowed from 2018 so investors' demand was high. Individual demand for municipals going forward will be mostly unaffected by tax reform as status quo treatment of tax-free municipal income was preserved.
The Fund returned 0.37% for the quarter and returned 3.94% for calendar year 2017. The Fund's duration was 10 to 15 percent lower than normal due to the heavy supply but the Fund still very actively participated in deals to benefit shareholders. It was quite a bifurcated market, new supply was priced in the primary market at a meaningful discount to the secondary market in order to attract buyers as broker-dealers/underwriters had very little interest in adding risk near year end.
As we start 2018, the Fund maintains a very high credit quality profile with over 85 percent of holdings being AAA- or AA-rated. Supply should be light to start the year then build into February and March. The Fund will look to add attractive intermediate tax-free yields at that time. In the meantime, elevated shorter term yields, 3 years or less, provide a reasonable conservative tax-free income stream.
Not FDIC insured | May lose value | No bank guarantee
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