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Demand for municipal bonds was strong during the first half of the quarter, before slowing in the second half. Investor momentum turned as municipal bond yields, which tend to follow Treasury yields, rose during the final month of the quarter. Supply, however, was subdued throughout the first two and a half months, before picking up the pace in March. Replaying a familiar theme from 2012, much of the issuance this year has consisted of refunded outstanding bonds that were near their first optional call dates.
Municipal bonds outperformed Treasuries during the first half of the quarter, but underperformed throughout most maturities in the second half, leaving the ratios of municipal bond yields to Treasury yields slightly higher than their levels at the start of the year. Demand for lower-quality municipal bonds continued to remain strong, as investors searched for yield in a low-rate environment; as a result, lower-quality bonds outperformed higher-quality bonds. In a reversal from last year's trend, bonds with shorter maturities performed better than intermediate-maturity and longer-maturity bonds, as interest rates increased on the intermediate and long end of the yield curve as the economy showed some signs of improvement.
Following the "fiscal cliff" deal on January 1, investors shifted their focus to a proposal circulating around Washington that would limit the tax exemption of municipal bonds to 28% for high-income earners. Over the past few months, there have been significant efforts by several groups to educate politicians on the unintentional impacts of such a change. Though the matter is not yet settled, the ramp-up in discussions with lawmakers is encouraging, as it reduces the probability that such a proposal will be implemented.
The Fund returned 1.64%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2013. The Fund's benchmark, The Barclays High Yield Municipal Bond Index,1 returned 1.97% in the same period. The Fund's average annual total returns, which reflect performance at the maximum 2.25% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of March 31, 2013, are: one year: 9.70%; five years: 4.12%; and since inception (December 30, 2004): 2.66%. Expense ratio, gross: 0.86%, and net: 0.80%.
Performance data quoted represent past performance, which does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The investment return and principal value of an investment in the fund will fluctuate so that shares, on any given day or when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, call Lord Abbett at 1-888-522-2388 or visit us at www.lordabbett.com.
State general obligation bonds and water and sewer bonds, which are at the higher end of the credit-quality spectrum, underperformed as heightened demand for lower-quality securities continued. Contributing to relative Fund performance was the overweight to the tobacco and airline sectors. Tobacco bonds benefited from a binding agreement on a new method of determining payments tobacco companies must pay under the 1998 Master Settlement Agreement. Airline bonds performed well due to improved earnings in addition to a bankruptcy court approval allowing a merger that will form the world's largest airline.
'AAA' rated securities were the worst performing credit quality category within the index. Below-investment-grade bonds performed the best on an absolute basis, as credit quality continued to improve along with the economy.
Bonds with maturities of five years and shorter underperformed on a relative basis, as very low yields persisted leaving very little room for further price appreciation. Within the high-yield portion of the market, bonds with maturities of 30 years and longer performed the best on a relative basis, as investor demand for yield continued amid an environment of historically low-interest rates.
At the state level, Illinois bonds detracted from absolute Fund performance, while Pennsylvania and Texas bonds outperformed due to the underlying sectors within the states, as opposed to any specific issues with the states themselves.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
Municipal bond yields continue to remain attractive on a taxable-equivalent basis, compared with yields of other taxable fixed-income alternatives. Demand for municipals started the year strong, before slowing during the final month of the quarter. The slowdown in demand was primarily driven by upward pressure on interest rates. As the year progresses, demand will depend upon the stability of interest rates as well as investors' comfort with market yields. Supply started the year off at a slow pace of issuance, but increased during the final month of the quarter. Similar to 2012, much of the issuance consisted of refunded outstanding bonds that were near their first optional call dates. We anticipate a similar volume of supply for 2013, barring any meaningful change in interest rates.
The ratio of municipal bond yields to Treasury yields remains low relative to the ratios since 2008; however, these ratios are still above pre-2008 levels. Municipal bond yields are near 100% of Treasury yields, and from an aftertax perspective, continue to remain attractive. The ratios across all maturities are expected to stay within a tight range throughout the remainder of the year.
A concern many municipal bond investors share is the proposal circulating around Washington that would limit the tax exemption of municipal bonds to 28% for high-income earners. Over recent months, there have been concerted efforts by several groups to educate politicians regarding the unintentional impacts of such a change. Even though the matter is not yet settled, the ramp-up in discussions with lawmakers is encouraging, as it reduces the probability that such a proposal will be implemented.
With interest rates at such low levels, increased demand for lower-quality municipal bonds is expected to continue as credit quality remains steady. In addition, we expect the lower half of the investment-grade range to continue to perform strongly as well.
The Federal Reserve has reiterated that it will attempt to keep short-term interest rates low for an extended period; as a result, the expectation is that the yield curve will remain steep and that longer-maturity bonds will outperform, although expected returns also look favorable in the 10-year maturity range. The increase in income by extending out the yield curve is significant in the context of a benign interest rate environment.
State revenues have increased each quarter as the economy continues to recover from the Great Recession. Going forward, slow economic growth and less than expected funding from the federal government is expected to encourage states to continue carefully managing their expenses amid a challenging environment for budgets. Given their recent success in recovering from the recession, we expect the vast majority of states to maintain their positive economic trends.
|Weekly - 12/03/2012||Article|
Performance data quoted is historical. Past performance is not indicative of future results. Current performance may be higher or lower than the performance quoted. The investment return and principal value of an investment in the Fund will fluctuate so that shares, on any given day or when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent quarter-end, go to quarter ending performance on our Website or call Lord Abbett at (888) 522-2388.
1 The Fund’s dividend yield is shown without sales charges (at NAV) and with maximum sales charges (at MOP). The Fund’s dividend yield takes into account any fee waiver or expense limitation arrangements, if any. Without such fee waivers or expense limitation arrangements, the Fund’s dividend yield would have been lower. Information regarding any fee waivers or expense limitation arrangements applicable to the Fund is provided with the Fund’s expense ratio information.
2 The Fund’s unsubsidized dividend yield is shown without sales charges (at NAV) and with maximum sales charges (at MOP). The Fund’s unsubsidized dividend yield reflects what the yield would have been without the affect of fee waivers or expense limitation arrangements.