Market Sector Update

• Municipal market performance was primarily driven by continued negative supply conditions. Positives from improving U.S. economic conditions, as well as continued tightening in labor and housing markets, were somewhat mitigated by anxiety surrounding trade/tariff tensions.
• Interest rates traded in a very narrow range and the yield curve steepened slightly. The Federal Reserve (Fed) hiked rates for the second time this year, and now project four total hikes for 2018, rather than the three hikes previously anticipated.
• 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 that these problems are not systemic, and that they will remain isolated.

Portfolio Strategy

• The Trump presidency is a potential market and economic game changer. 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. In addition, the budget deal that was signed into law on Feb. 9 will probably require high levels of deficit financing.
• We expect monetary policy operations in Europe and Japan to be less stimulative 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.
• 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.

Outlook

• We remain confident that municipal bond defaults will continue to be much lower than any other fixed-income alternatives, besides U.S. Treasuries.
• As stated above, the Tax Cuts and Jobs Act introduces the possibility that U.S. economic growth will exceed expectations, which could also result in inflation readings that are higher than currently anticipated. In addition, President Trump continues to roll back and eliminate onerous regulatory policies, which may add an additional boost to U.S. economic growth potential. Increased Treasury financing needs and the Fed reducing the size of its balance sheet may put additional upward pressure on interest rates.
• 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.
• 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, i.e. banks and insurance companies. Lower supply due to the loss of advance refundings may also provide some support, along with additional demand from foreign buyers.
• 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 Fed Funds rate, global bond yields have been pulled modestly higher. The great "taper" is coming; the U.S. Federal Reserve 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 their 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 mid-term elections, potential trade/tariff wars, and the Mueller investigation could change everything. Stay tuned!

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 June 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.