Higher federal tax rates and continued strong cash inflows provided support for tax-exempt bonds early in the quarter. However, cash outflows and heavy supply pressured the municipal market late in the period, leading to underperformance relative to Treasuries. Issuers continued to refinance their more expensive outstanding debt, but the improved fiscal positions of states and municipalities allowed them to begin targeting much-needed capital projects. This trend led to increased new issuance. Tax-exempt yields ended the period higher than comparable Treasury yields, with the exception of the longest maturities.
The Short-Intermediate Tax-Exempt Fund returned 0.20%. While we focused on reducing the Funds "barbell" structure, our slightly broader maturity profile detracted from performance due to the steepening of the yield curve. A tightening of credit spreads also subtracted from relative performance due to the Funds overweight positions in higher-quality bonds and the more conservative sectors of the market. However, we intend to maintain a focus on top-tier, conservative credits and sectors. The Funds defensive duration profile enhanced performance given the increase in yields.
If you are an investor seeking higher current income, but potentially less price volatility than the Intermediate Tax-Exempt Fund, with income exempt from regular federal income tax, you may find this Fund attractive. It is well suited for income-oriented investors in higher tax brackets who are willing to accept some risk of principal in exchange for higher yield potential. Income from the Fund may be subject to federal alternative minimum tax (AMT), state and local taxes.