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* At the 28% tax bracket, the tax-equivalent yields would be 2.79%, 3.63%, 5.50%, and 7.86% for the AA Rated, A Rated, BBB Rated, and High-Yield Municipal indexes, respectively. Tax-equivalent yield calculation for the municipal indexes above assumes the top marginal tax bracket of 43.4% on investment income, which includes the 39.6% income tax rate and the 3.8% in Medicare tax. This tax rate does not factor in the effect of AMT (alternative minimum tax) or taxes in your individual state. Tax-equivalent yield will vary based on an investor's tax bracket.
** Represents a data subset of the Barclays Municipal Bond Index
† Represents BofA/ML High Yield Master II Constrained Index.
Sources: BofA Merrill Lynch Index data. Investment-grade municipal data represented by the BofA Municipal Bond Index and investment-grade corporate data represented by the BofA U.S. Corporates Index.
Source: Barclays Index data.
Lower-rated bonds may carry greater risks than higher-rated bonds. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state, and local taxes may apply.
The historical data are for illustrative purposes only, do not represent the performance of any Lord Abbett mutual fund or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Investors may experience different results. Due to market volatility, the market may not perform in a similar manner in the future.
Past performance is no guarantee of future results. Please refer to "Important Information" regarding the economic indicator data in these charts and index information.
The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.
With the passage of the American Taxpayer Relief Act of 2012, Congress and President Obama averted much of the "fiscal cliff," and made permanent for most taxpayers the tax cuts enacted under President George W. Bush. Only married couples earning more than $450,000 and singles making more than $400,000 will see their rates revert to rates in place before President Bush.
This does not mean, however, that all those earning less than this will pay less in taxes in 2013. One portion of the fiscal cliff that was not averted was the new Medicare surcharge enacted as part of the Affordable Care Act. Workers earning $250,000 or more ($200,000 for singles) will now have to pay an extra 3.8% on investment income. And unlike the higher rates on top earners, this new tax is not indexed for inflation, meaning that more and more earners will be subject to this surcharge as the years go by.
Because municipal bonds generally remain exempt from federal taxes, this Medicare surcharge, as well as the higher rates on the top earners, makes munis more attractive. In fact, on a tax-equivalent basis, the yields on munis easily outshine those on corporate bonds. 'BBB' rated munis, for example, were yielding 7.0% on a tax-equivalent basis, as of December 31, 2012, for earners in the top bracket, versus just 3.29% for similarly rated corporates.
Adding to munis' appeal, yield spreads remain high. The spread of 'BBB' rated munis, for example, over those rated 'AAA' is 220 basis points (bps), which is above the long-run average of 169 bps. This suggests the potential for some price appreciation in addition to the healthy yield.
But isn't there a widespread danger of defaults in the muni market? "Defaults have never reached the level that was widely feared a few years ago," said Zane Brown, Lord Abbett Partner and Fixed Income Strategist, "and they have actually been lower than average over the last several years." Moreover, muni finances continue to strengthen. "Tax revenues for state and local governments have risen for 11 straight quarters, and that improvement has come not only from income and sales taxes, but recently also from property taxes," Brown said.
IMPORTANT INFORMATION
All links are directed to Lord Abbett's website.
Past performance is no guarantee of future results. Current performance may be higher or lower than the performance data quoted. All indexes are unmanaged and do not reflect reinvestment of dividends and distributions, deduction of management fees, or operating expenses. An investor cannot invest directly in an index.
Investors should consult with a financial advisor on the strategy best for them based on their individual goals, risk tolerance, and investing time horizon.
Neither diversification nor asset allocation can guarantee a profit or protect against loss in declining markets.
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. The value of investments in fixed-income securities will change as interest rates fluctuate. As interest rates fall, the prices of debt securities tend to rise, and as interest rates rise, the prices of debt securities tend to fall. Investments in high-yield securities (sometimes called junk bonds) carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Income from municipal securities may be subject to the alternative minimum tax. Federal, state, and local taxes may apply. There is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-exempt income. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. No investing strategy can overcome all market volatility or guarantee future results.
Foreign securities generally pose greater risk than domestic securities, including greater price fluctuations and higher transaction costs. Foreign investments also may be affected by changes in currency rates or currency controls. With respect to certain foreign countries, there is a possibility of nationalization, expropriation, or confiscatory taxation, imposition of withholding or other taxes, and political or social instability that could affect investments in those countries. The securities markets of emerging countries tend to be less liquid, to be especially subject to greater price volatility, to have a smaller market capitalization, and to have less government regulation, and may not be subject to as extensive and frequent accounting, financial, and other reporting requirements as securities issued in more developed countries. Further, investing in the securities of issuers located in certain emerging countries may present a greater risk of loss resulting from problems in security registration and custody or substantial economic or political disruptions. Foreign currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by supply and demand in the foreign exchange markets and relative merits of investments in different countries, actual or perceived changes in interest rates, and other complex factors. Currency exchange rates also can be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments or central banks, or by currency controls or political developments.
While municipal bonds are backed by municipalities, U.S. government securities, such as U.S. Treasury bills, are considered less risky since they are backed by the U.S. government. High-yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principal on these securities.
Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements.
Standard Deviation is a statistical measurement of the range of a fund's total returns. In general, a higher standard deviation means greater volatility.
Current yield is calculated by dividing annual investment income by the current price of an asset.
Taxable equivalent yield is the pretax yield that a taxable bond needs to possess for its yield to be equal to that of a tax-free municipal bond. It does not reflect state and local income taxes or the alternative minimum tax, if any and will vary based on each investor's tax bracket.
The credit quality ratings of the securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor's, Moody's, or Fitch, as an indication of an issuer's creditworthiness. Ratings range from AAA (highest) to D (lowest). Bonds rated BBB or above are considered investment grade. Credit ratings BB and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principal on these securities. Credit quality distributions breakdown is not an S&P credit rating or an opinion of S&P as to the creditworthiness of the portfolio.
The S&P 500® Index is a market capitalization-weighted index of common stocks.
The S&P 500® Index Excluding Financials is a subset of the S&P 500 Index that excludes the financial sector.
The opinions in Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in the Fund's summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388, or visit us at www.lordabbett.com. Read the prospectus carefully before investing.
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