Market Review as of 03/31/2015

The U.S. municipal bond market (as represented by the Barclays Municipal Bond Index1) continued to advance in the first quarter of 2015. The supply of newly issued municipal bonds was high, exceeding expectations throughout the quarter. Refunding issuance to refinance outstanding bonds in the low interest-rate environment increased significantly, while new money issuance for new projects did not grow. The large new-issue supply weighed somewhat on the returns for the municipal market.

Individual investor demand was positive throughout the quarter, although it was not as strong as it was during the final quarter of 2014. Longer maturities outperformed their shorter-dated counterparts, as the bond market continued to surprise forecasters. Interest rates defied expectations by not rising, as inflation remained dormant and U.S. economic growth was restrained by weakness in other parts of the globe.

In general, bonds in the lower investment-grade and high-yield categories outperformed higher-rated bonds due to continued investor demand for incremental yield. Credit quality remained stable in an economic environment marked by steady, if unspectacular, growth and low inflation.

Municipal bonds slightly outperformed U.S. Treasury securities on the long end of the yield curve, while slightly underperforming on the short end. Yield ratios of municipals to Treasuries remained higher than historical averages on maturities of 10 years and longer.

The generally stable environment for municipal finance, which had helped support the municipal bond market’s performance in recent quarters, remained in place. A February 2015 report2 from the Rockefeller Institute stated that state revenue collections are expected to show “continuous and steady growth in the coming quarters due to the disappearing impact of the federal fiscal cliff.” The report said the outlook for the remainder of fiscal year 2015 remains positive in most states. “However, oil-rich states are facing heightened fiscal challenges due to drops in oil prices,” the report added.

Among high-profile issuers, Puerto Rico remained in the spotlight as the commonwealth continues to work through its economic and financial issues.  A group of investors were negotiating with the Puerto Rico Electric Power Authority over a potential restructuring, while the Puerto Rican government was working toward bringing a new bond issue backed by petroleum taxes.  These issues put pressure on Puerto Rican bonds and led to much uncertainty about future outcomes.

Fund Review as of 03/31/2015

The Fund returned 1.56%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2015. The Fund’s benchmark, the Barclays High Yield Municipal Bond Index,3 returned 1.11% 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, 2015, are: one year: 7.92%; five years: 5.54%;and ten years: 2.74%. Expense ratio, gross: 0.91%, and net (excluding interest and related expenses): 0.82%.

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. You can obtain performance data current to the most recent month-end by calling Lord Abbett at 888-522-2388 or visiting us at

The largest contributor to relative performance was the portfolio’s underweight to Puerto Rico bonds, as the commonwealth posted negative returns during the quarter, while most of the high-yield municipal market constituents posted positive returns. Higher-quality bonds underperformed lower-quality bonds, as there was strong demand for lower-rated credits. Bonds with maturities of 25 years and longer performed the best, as yields declined more in longer-maturity bonds than shorter-maturity bonds and investors were willing to extend maturities in pursuit of incremental yield. Consequently, bonds with shorter maturities underperformed. With regard to sectors, tobacco and airlines performed well. The tobacco sector is more credit-intensive and offers incrementally higher yield compared to other sectors. The airlines sector benefited from improving credit fundamentals, such as lower oil prices. State general obligation bonds and industrial revenue bond sectors underperformed this quarter. The state general obligation bond performance is attributable to its allocation to Puerto Rico, while the industrial revenue bond sector consisted of older issues with shorter call features, consequently limiting their duration, which prevented them from participating in spread tightening during the quarter. From a state perspective, California bonds outperformed, as demand was strong due to the state’s improving credit quality and in-state demand for the tax exemption. Puerto Rico bonds underperformed, as several large issuers continue to work through their economic and financial stress.

Please refer to under the “Portfolio” tab for a complete list of holdings of the Fund, including the securities discussed above.


While there are challenges of increased market volatility and uncertainty regarding the Fed’s upcoming interest rate moves, municipal yields continue to provide investors with compelling tax-equivalent returns, as valuations relative to other fixed-income asset classes remain attractive and historical default rates remain low. The volume of new issues of municipal bonds has risen in recent months, after a slow start coming into 2014, as increased refunding activity and low interest rates continue to attract issuers to the market. The outstanding supply of bonds, however, has been decreasing due to bond maturities and early redemptions, so net supply continues to be negative. This aspect of the market is favorable for performance because market participants are likely to reinvest proceeds from called and matured bonds. Demand from new cash invested also should continue to provide support to the asset class, as increased tax rates improve relative valuations on an after-tax basis. It is likely, then, that this trend of a positive supply and demand dynamic will continue into 2015.

Despite the strong returns of lower-rated bonds in 2014, credit spreads still remain attractive compared with pre-crisis levels, while overall credit fundamentals of the market continue to improve. This combination suggests that lower-quality bonds could continue to outperform going forward. Longer maturities have outperformed considerably in 2014, as the yield curve was relatively steep and enticed investors to extend maturities. Since the Fed has indicated its intention to increase short-term rates during the second half of 2015, the yield curve is likely to flatten, with shorter rates rising more than longer rates. However, the pace of rate changes and the magnitude of those changes will determine which maturities will outperform in 2015. While it is likely that longer maturities will outperform in 2015, this outcome is contingent on two major factors: the level of economic growth and whether inflation will continue to stay low.

While there have been a few negative outliers with regard to the health of states, most notably pension issues in New Jersey and Illinois, states are doing well overall, as the economy is providing steady growth and tax revenues are rising. High-grade small states such as Alaska, which are largely dependent upon oil, will need to cut budgets due to decreased revenues. Such states are likely to have a minor impact on the overall municipal market, as they are small issuers. On a federal level, continued political discussion around the benefits of the tax exemption could affect the municipal market. While the dynamic of the municipal bond market has changed considerably over the past few years, municipal bonds continue to offer the combination of a high credit-quality profile and strong tax-equivalent returns to investors. 

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