Market Review as of 3/31/2016

The U.S. municipal bond market (as represented by the Barclays Municipal Bond Index1) continued to advance in the first quarter, surpassing the returns of other notable asset classes during the period. With respect to issuance during the quarter, total issuance slightly lagged that of the first quarter of the prior year. While refunding issues exceeded new capital issuance during the period, refunding issues fell short of expectations, despite the continued low interest rate environment.

Investor demand for municipal bonds remained strong, as these bonds posted attractive returns on a relative basis. Consequently, municipal fund flows, based on information from Lipper U.S. fund flows, exceeded $14 billion at the end of the quarter. Longer maturity municipal bonds outperformed shorter maturity municipal bonds, however, municipal bonds generally underperformed Treasuries of similar maturities across the yield curve, as yield ratios increased during the period.

Lower quality bonds generally outperformed higher quality bonds during the first quarter, due to the incremental yield available in such credits. The high yield municipal market outperformed investment grade municipals, and with the exception of a few issuers, overall municipal credit quality remained stable in an economic environment marked by steady, albeit slow growth and low inflation.

High-profile issuers, such as Illinois, Puerto Rico, and New Jersey, continued to remain in the spotlight during the past quarter, as struggles over pension issues and the political constraints caused by budget balancing activities endured. Despite isolated pockets of distress, overall creditworthiness continues to improve, as most states’ finances experienced rising revenues, while maintaining balanced budgets. At the federal level, there was no new legislation that had a material impact on the municipal market.

Fund Review as of 3/31/2016

The Fund returned 2.38%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2016. The Fund’s benchmark, the Barclays High Yield Municipal Bond Index,2 returned 2.74% 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, 2016, are: one year: 2.16%; five years: 6.74%; and 10 years: 2.53%. Expense ratio, gross: 0.87%, and net: 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 detractor to relative outperformance was the portfolio’s underweight to tobacco settlement bonds, as these bonds performed well due to increased consumption statistics and the persistent demand for incremental yield. Bonds with maturities of 25 years and longer outperformed, as the yield curve flattened during the quarter. Consequently, bonds with maturities five years and shorter underperformed. ‘AAA’ rated bonds generally underperformed, as these bonds did not participate in the spread tightening experienced by lower rated bonds during the period. Tobacco settlement and charter school bonds outperformed, while state and local general obligation bonds underperformed. Both tobacco and charter school bonds benefited from the demand for incremental yield. In addition, charter school bonds were also positively influenced by increased student enrollment in many parts of the country, resulting in steady credit performance. Exposure to the state and local general obligation bonds detracted from performance, as larger issuers such as Chicago and Puerto Rico continue to struggle with financial pressures.

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


During the first quarter, amid continued global market volatility, municipal investors experienced strong performance when compared to many other asset classes. Despite the general slowdown of municipal fund flows towards tax season in past years, demand picked up significantly during the period, a continuation of the trend seen in the fourth quarter of 2015, as the combination of solid relative performance and a low rate environment turned more attention toward municipal debt. Demand for municipals is likely to continue, given municipal yields continue to provide investors with compelling taxable-equivalent income, default rates that remain low, and overall creditworthiness that continues to improve. Although supply during the period persisted at a relatively high level when compared with last year’s pace, new-issue supply fell short of expectations for the quarter. It is likely that refunding activity will increase in the upcoming quarter and new-issue supply will continue at a reasonable pace, as issuers become more confident in financing bonds for infrastructure needs. 

The treasury and municipal yield curves are likely to move in a similar direction going forward, given that both markets are impacted by future Federal Reserve action amid a slow growth, low inflationary environment. Both markets might also continue to maintain the relative steepness of their respective yield curves, contingent on gradual and measured future activity from the Fed. While lower rated bonds have posted strong returns in past years, credit quality trends suggest that lower quality bonds may continue to outperform in the quarters to come, due to demand for incremental yield in a low interest rate environment and steady economic growth amid low inflation, supporting the credit quality of municipal issuers. In addition, a continuation of a combination of light new issue supply and investor demand may lead to attractive returns for lower rated bonds going forward. Longer maturities are also expected to outperform as the yield curve may flatten further, given the current steepness of the yield curve amid muted inflation and subdued economic growth.

Although a few high-profile issuers, such as New Jersey and Illinois, are hampered by challenges and will likely continue to remain under pressure, as a result of pension reform and funding of pension liabilities, it is important to focus on overall state health and creditworthiness, which is expected to remain strong. With respect to the financial health at the state level, it is essential to distinguish between the isolated challenges and the strong overall health of states. While the dynamic of the municipal bond market has changed considerably over the past few years, municipal bonds overall have continued to offer the combination of a high credit quality profile and strong taxable-equivalent returns to investors. 

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