Tax-Advantaged Bond Strategies Short Term Fund (A) Share
Class

A

• A
• C
• I

A Word On The Markets  as of Mar 31, 2013

The municipal bond market, as measured by the Barclays Municipal Bond Index,⁹, 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 curve¹⁰ 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 Tax-Advantaged Bond Strategies Short Term Fund (the Fund) underperformed its benchmark, the Barclays Capital 5 Year Municipal Bond Index (the Index),² during the quarter.

• Favorable security selection and trading bolstered the Fund’s performance relative to the Index.
• The Fund’s yield curve positioning detracted from its performance relative to the Index.
• Also detracting from the Fund’s performance versus the Index was the credit quality positioning of the Fund’s underlying investments.

Contributors 

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

• The Fund’s performance relative to the Index was bolstered by security selection, as many of the securities held by the Fund outperformed similar securities in the Index.
• Management’s ability to capitalize on muni market inefficiencies by actively trading securities contributed to performance relative to the Index as well.

Detractors 

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

• Yield curve positioning detracted from the Fund’s performance relative to the Index. Specifically, the Fund was underweight five-year bonds and overweight those with maturities of seven to 10 years. This positioning was disadvantageous for the Fund, as seven- to 10-year bonds underperformed five-year bonds during the quarter.
• Throughout the quarter, the Fund was overweight AAA-rated municipals and underweight in A-rated and BBB-rated securities. This high-quality bias, a hallmark of the Fund’s strategy, modestly detracted from performance relative to the Index, as higher-yielding A-rated bonds outpaced their higher-quality counterparts amid investors’ strong appetite for yield.

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 exemption¹¹ 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.

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. 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. While certain U.S. government-sponsored agencies may be chartered or sponsored by acts of Congress, their securities are neither issued nor guaranteed by the U.S. Treasury. 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. 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. While certain U.S. government-sponsored agencies may be chartered or sponsored by acts of Congress, their securities are neither issued nor guaranteed by the U.S. Treasury. 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.