U.S. bonds were mostly flat in the first quarter as longer-term Treasury yields increased. The Federal Reserve kept short-term interest rates low and persisted with its program of purchasing $85 billion in Treasury and mortgage-backed securities every month. Municipal bonds generated positive returns, with long-term high yield tax-free securities outperforming short-term and high-quality issues. Revenue bonds outperformed local and state general obligations (GOs).
The Tax-Free High Yield Fund returned 1.27% in the quarter compared with 0.88% for the Barclays 65% High-Grade/35% High-Yield Index and 1.14% for the Lipper High Yield Municipal Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 10.09% versus 8.34% for the Barclays 65% High-Grade/35% High-Yield Index and 10.10% for the Lipper High Yield Municipal Debt Funds Average. The fund's average annual total returns were 10.09%, 6.89%, and 5.70% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.68% as of its fiscal year ended February 29, 2012.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The Tax-Free High Yield Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
Significant demand for higher yield in a low interest rate world drove risk premiums lower. As a result, prices for medium- and lower-quality municipals rallied more than those of comparable higher-quality bonds. We emphasized essential service revenue bonds over GOs. Cash flows generated by these public projects are durable and have been greatly insulated from pension and other long-term liability challenges facing many state and local borrowers. Our public power and utility bonds continued to perform well. We also favored the transportation sector of the municipal market, including airport and toll roads. These projects often enjoy limited competition, which strengthens the bonds' creditworthiness. On a negative note, our maturities less than three years lagged, as they offered little in yield while rates were stable.
In this low-rate environment, long-term bonds and lower-rated sectors still represent reasonable value relative to taxable fixed income alternatives. While we are comforted somewhat by Federal Reserve assurances that interest rate hikes are not imminent and by the demonstrated ability of states to balance their budgets in tough times, we are mindful that municipal yields are at or near historic lows and there is the potential for losses if rates rise in response to stronger economic growth or inflation. Although we expect rates to stay range-bound in the period ahead, we are careful with any investment shift that might materially increase our portfolio's interest rate sensitivity.