National Municipal Opportunities Trust

A Word On The Markets  as of Mar 31, 2013

The municipal bond market, as measured by the Barclays Capital Long (22+) Municipal Bond Index (the Index),⁵ 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 federal income tax exemption for munis,⁶ but also raised federal income 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 curve⁷ 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 Opportunities Trust (the Trust) (EOT) outperformed the Index at net asset value during the quarter. The overall credit quality of the Fund’s underlying investments—particularly an overweighting in bonds rated BBB⁸ or below—contributed to outperformance relative to the Index, as lower-quality securities outperformed bonds with higher credit ratings. The Fund’s security selection among such securities also proved beneficial. As for sector weightings, larger-than-Index exposure to hospital bonds and industrial development revenue bonds was a plus, as these sectors were two of the best-performing segments of the municipal bond market during the quarter. Additionally, the Fund’s larger exposure to zero coupon bonds (zeros) and Treasury futures was beneficial, as both segments were among the better-performing coupon structures in the Index. Leverage employed through the use of tender-option bonds was also beneficial to performance. On the other hand, security selection among high-quality 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 federal income tax rates for the wealthiest U.S. taxpayers, making the tax exemption⁶ 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.

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

The information contained herein is provided for informational purposes only and does not constitute a solicitation of an offer to buy or sell Fund shares. Common shares of the Fund are only available for purchase and sale at current market price on a stock exchange. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to investment risks, including possible loss of principal invested. The Fund is not a complete investment program and you may lose money investing in the Fund. An investment in the Fund may not be appropriate for all investors.

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