National Municipal Income Fund (A) Share
Class

A

• A
• B
• C
• I

A Word On The Markets  as of Mar 31, 2013

The municipal bond market, as measured by the Barclays Capital Municipal Bond Index³, posted a modestly positive return during the first quarter of 2013, gaining 0.29%. This return marked the ninth straight quarterly gain for the muni market.

The Index began the quarter with a gain in January (0.42%). Despite rising Treasury yields, munis rallied after the fiscal cliff deal not only spared the exemption for munis, but also raised taxes on the wealthy—a move expected to fuel continued demand for munis. In February, the Index again posted a slightly positive return (0.30%), as Treasury yields fell amid continued easy monetary policy by the Federal Reserve, the prospect of U.S. government spending cuts resulting from the sequester and renewed concerns about the European debt crisis. In March, a traditionally weak period for munis as investors draw money out of munis to pay for their tax liabilities, the Index lost ground (-0.43%). Demand was further tempered as investors poured more money into equities, and new issue supply increased compared to February. However, munis perked up at the end of March when U.S. bonds attracted safety-minded investors seeking a potential haven due to the Cyprus banking crisis.

For the quarter overall, longer-term bonds outpaced shorter-maturity securities, as investors continued to gravitate toward bonds with higher yields. This comparatively strong demand for longer-term securities resulted in a further flattening of the yield curve¹³ during the quarter. On a total return basis, lower-quality bonds also were helped by demand from yield-hungry investors and outpaced higher-quality counterparts as a result.

Performance Summary 

Eaton Vance National Municipal Income Fund (the Fund) outperformed its benchmark, the Barclays Capital Municipal Bond Index (the Index), at net asset value during the quarter

• The yield curve and credit quality positioning of the Fund’s underlying investments were major contributors to its outperformance relative to the Index. Certain sector selection decisions also benefited the Fund’s performance versus the Index.
• The Fund’s larger exposure to zero coupon bonds (zeros) also bolstered performance relative to the Index. Additionally, the Fund’s position in Treasury futures contributed to outperformance of the Index, which doesn’t include such derivative instruments.
• Detracting from the Fund’s performance versus the Index was security selection among high-quality, intermediate-maturity general obligation bonds.

Contributors 

Factors contributing to the Fund’s relative performance compared to the Index during the quarter:

• In terms of yield curve positioning, the Fund benefited from a larger-than-Index position in 20- to 30-year bonds. During the quarter, these longer-maturity bonds generally outpaced their shorter-term counterparts.
• The overall credit quality of the Fund’s underlying investments—particularly an overweighting in bonds rated BBB/Baa and below—also contributed to outperformance relative to the Index, as lower-quality securities outperformed bonds with higher credit ratings.
• In terms of sector weightings, the Fund’s larger-than-Index exposure to industrial development revenue bonds was a plus, as the sector was the best-performing segment of the municipal bond market during the quarter.
• The Fund’s larger exposure to zeros was beneficial, as zeros were among the better-performing coupon structures in the Index, outpacing many coupon-bearing bonds.
• The Fund’s exposure to Treasury futures, which are not included in the Index, worked to its advantage, as these derivatives contracts—which were used to manage the Fund’s overall interest rate sensitivity—appreciated more than the Index during the quarter.

Detractors 

Factors detracting from the Fund’s relative performance compared to the Index during the quarter:

• Security selection among high-quality, intermediate-maturity general obligation bonds detracted from the Fund’s performance versus the Index, as holdings in this segment underperformed similar securities in the Index.

Investment Outlook And Fund Positioning 

Management is cautiously optimistic about the prospects for munis in 2013. The American Taxpayer Relief Act of 2012 raised the top marginal tax rates for the wealthiest U.S. taxpayers, making the tax exemption¹⁴ afforded to municipal bonds that much more appealing in our view. Additionally, munis were still priced attractively at the end of the first quarter, with the ratio of the 30-year AAA-rated municipal bond yield to U.S. Treasury bond yield at 100%. Investors were essentially getting the tax benefit offered by the highest-quality municipal bonds for free. Furthermore, our view is that there is little support in Washington, D.C. for proposals calling for a cap on munis’ tax exemption, and we don’t foresee an imminent threat to munis’ tax advantages. Against those solid demand trends, we expect the net supply of munis will continue to shrink. Although credit concerns are likely to remain in the headlines in the coming year, we don’t expect a significant uptick in muni defaults. Even so, we believe shareholders would be best served to adjust their expectations, with munis “earning their coupon” in 2013.

The views expressed in this report are those of portfolio manager(s) and are current only through the date stated at the top of this page. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. This commentary may contain statements that are not historical facts, referred to as "forward looking statements". The Fund's actual future results may differ significantly from those stated in any forward-looking statement, depending on factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of Fund shares, the continuation of investment advisory, administrative and service contracts, and other risks discussed from time to time in the Fund's filings with the Securities and Exchange Commission.

Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding.

The information included herein does not reflect securities deemed to be held by the Fund pursuant to financial accounting standard 140 (FAS 140).

About Risk 

An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non–payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher rated investments. Derivatives instruments can be used to take both long and short positions, be highly volatile, result in economic leverage (which can magnify losses), and involve risks in addition to the risks of the underlying instrument on which the derivative is based, such as counterparty, correlation and liquidity risk. If a counterparty is unable to honor its commitments, the value of Fund shares may decline and/or the Fund could experience delays in the return of collateral or other assets held by the counterparty. No Fund is a complete investment program and you may lose money investing in a Fund. The Fund may engage in other investment practices that may involve additional risks and you should review the Fund prospectus for a complete description.

No attribution information is available.

Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding.

About Risk 

An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non–payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher rated investments. Derivatives instruments can be used to take both long and short positions, be highly volatile, result in economic leverage (which can magnify losses), and involve risks in addition to the risks of the underlying instrument on which the derivative is based, such as counterparty, correlation and liquidity risk. If a counterparty is unable to honor its commitments, the value of Fund shares may decline and/or the Fund could experience delays in the return of collateral or other assets held by the counterparty. No Fund is a complete investment program and you may lose money investing in a Fund. The Fund may engage in other investment practices that may involve additional risks and you should review the Fund prospectus for a complete description.