Market Sector Update

• Municipal market performance was primarily driven by a strong rally in the Treasury market.
• Performance was also enhanced by a continued supply/demand imbalance and increased investor interest in taxavoidance strategies linked to the cap on the state and local tax (SALT) deduction from the new tax bill. The Federal Reserve (Fed) surprised markets with an aggressive policy reversal as it moved to a very dovish position. Concerns about slowing global growth, trade war angst and Brexit uncertainty were the primary drivers for the change in policy, as well as mild inflation pressures.
• Interest rates declined sharply in the quarter and the yield curve flattened modestly. The Treasury market yield curve inverted between the 3-month bill and the 10-year which the market interpreted as a signal that a recession is forthcoming. We are not convinced this metric holds the same validity as in the past due to the unconventional easy monetary policy operations implemented by the Fed and other central banks in the last decade.
• Defaults in the municipal bond asset class continue to be rare. While we anticipate increased headline risk from municipal issuers that have severely underfunded pensions and other post-retirement benefit obligations, we continue to believe these problems are not systemic and they will remain isolated.

Portfolio Strategy

• The Fund had a positive return, but underperformed its benchmark. 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 will continue to look for attractive opportunities to re-invest cash flow from bond income and maturity proceeds, but we believe valuations are stretched after the recent aggressive rally and we are proceeding with a high level of caution and patience.
• 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 underfunding 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 except U.S. Treasuries.
• While we ultimately expect Treasury yields to be the key driver of the municipal market, we believe municipal bonds are currently at stretched valuations. We have also experienced unprecedented cash flows into the municipal bond asset class year to date. Historically, it has been prudent to not invest aggressively at extremes. Therefore, we are exercising patience based on the belief there will be a more attractive entry point to deploy some of our excess cash.
• While we acknowledge that the numerous risks cited above will need to be monitored closely, we believe that financial markets have overreacted to some degree and are not in sync with relatively robust economic reality. We are cautiously optimistic that a U.S. trade deal with China will relieve some of the Fed's anxiety regarding U.S. economic growth prospects going forward.
• Anticipated higher levels of Treasury issuance in the future to finance budget deficits, as well as a potential inflation surprise could force the Fed to temper its extremely dovish policy stance.
• The big wild card moving forward is the Trump presidency. We remain cautiously optimistic that President Donald Trump's policies will result in enhanced economic growth, but much could go wrong given the high level of divisiveness in Congress. A lack of resolution in the trade conflict with China or an escalation of tensions, as well as the possibility of a policy mistake by the Fed could prove to be very destabilizing. The Democratic controlled House and continued partisan bickering over the Mueller investigation could also prove to be difficult obstacles for the president.

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 March 31, 2019, 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.