Tax-exempt yield levels reached two-year highs during the third quarter, as the seasonal summer boost was offset by challenging conditions in the fixed-income markets. Heavy mutual fund outflows continued, and news of Detroits bankruptcy filing put added pressure on the municipal market. Although the Federal Reserve mapped out an expected timeframe for reducing quantitative easing at its June meeting, the Fed surprised markets in September by delaying plans to taper quantitative easing due to fragile economic conditions and weaker employment gains. The Feds September statement helped to fuel a rebound in tax-exempt bonds. Yields declined through the 10-year range for the full quarter, but generally increased for bonds with maturities beyond 10 years.
The Short-Intermediate Tax-Exempt Fund returned 0.55% for the quarter. Our defensive duration profile afforded us the opportunity to deploy available cash, along with the proceeds from maturing bonds, into securities in the five- to eight-year range. We focused on state general obligation bonds, where we sought to take advantage of higher rates and the steeper yield curve. Although we added a modest amount of duration in the process, we remain modestly defensive overall. We continue to carry above-average cash levels in anticipation of capitalizing on continued elevated volatility. The Funds more conservative, high-quality credit profile benefited shareholders during the quarter. The Fund has no exposure to BBB-rated securities, which underperformed.
Looking ahead, we expect weaker seasonal technical factors to take hold in the fourth quarter as reinvestment demand decreases and new-issue supply increases from its light third quarter pace.
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.