Market Sector Update

• Municipal market performance was primarily driven by an aggressive sell-off in the Treasury market. A robust U.S. economy, high levels of consumer and business confidence, as well as robust corporate earnings resulted in a very positive risk-on environment.
• Interest rates backed up significantly in the quarter and the yield curve flattened modestly.
• Defaults in the municipal bond asset class continue to be rare. While we anticipate increased headline risk from municipal issuers that have severely under-funded pensions and other post-retirement benefit obligations, we continue to believe these problems are not systemic and they will remain isolated.

Portfolio Strategy

• Treasury and municipal rates remain at very low historical levels. The portfolio duration is currently shorter than our benchmark, and the portfolio is defensively structured. We continue to maintain our overweight slant to spread product in the A-BBB range.
• We will continue to place emphasis on diversification, higher (overall) credit quality and yield curve positioning.
• We expect to see continued headlines on municipal pension under-funding and other post-retirement benefits issues. We will remain vigilant in monitoring these situations and we will endeavor to avoid investments with these issuers.

Outlook

• We remain confident that municipal bond defaults will continue to be much lower than any other fixed-income alternatives, besides U.S. Treasuries.
• While we ultimately expect Treasury yields to be the primary driver of the municipal market, municipal bonds are attractively priced for potential out-performance. This is tempered slightly by the reduction in corporate tax rates, which may result in municipal bonds being viewed as less attractive to some traditional corporate buyers, and has already led to selling by some of these institutions, especially banks. Lower supply due to the loss of advance refundings may also provide some support, along with additional demand from foreign buyers.
• The Trump presidency is a potential market and economic game changer. President Trump continues to roll back and eliminate onerous regulatory policies, which may provide an additional boost to U.S. economic growth. Additionally, the Tax Cuts and Jobs Act has the potential to stimulate economic growth above market expectations, while also putting upward pressure on persistently low levels of inflation. Anticipated higher levels of Treasury issuance in the future to finance budget deficits, as well as the Federal Reserve (Fed) in early stages of quantitative tightening may put additional upward pressure on interest rates.
• We expect most major central banks to begin reducing existing monetary stimulus going forward, which will remove one of the obstacles impeding a rise in U.S. interest rates. Geopolitical risk is the new normal and it will continue to elevate the potential for periodic bouts of flight-to-quality investments.
• For several years we have felt that the 35+ year bull market was nearing an end. There is much uncertainty in the market, which continues to keep bond yields at very low levels. However, as the Federal Open Market Committee has begun to slowly raise the federal funds rate, global bond yields have been pulled modestly higher. The great "taper" is underway, but to date it has been quite orderly; the Fed has begun to reduce the size of its balance sheet, and the European Central Bank and the Bank of England will follow suit in the not-too-distant future. In addition, we anticipate a significant increase in global bond supply, and an elevated risk that China may begin to liquidate some of its large holdings in U.S. Treasuries.
• The big wild card moving forward is the Trump presidency. We remain cautiously optimistic that President Trump's policies will result in enhanced economic growth, but much could go wrong given the high level of divisiveness in Congress. Upcoming midterm elections, potential trade/tariff wars and the Mueller investigation could change everything.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through September 30, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Diversification and asset allocation are investment strategies that attempt to manage risk within your portfolio but do not guarantee profits or protect against loss in declining markets.

Risk factors: The value of the Fund's shares will change, and you could lose money by investing. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below-investment-grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.