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The views expressed in these posts are those of the authors and are current only through the date stated. 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 for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Evan Rourke, CFAMunicipal Portfolio Manager, Eaton Vance Management

      New York - Interesting times are often challenging ones. In July of this year, the current U.S. economic expansion set the postwar record as the longest run of uninterrupted growth. The economic data points to continued slow growth and persistently low inflation. (Through Q2 2019, chain-weighted gross domestic product (GDP)* year-over-year growth was 2.3% and the PCE deflator** year-over-year was 1.4%).

      However, investors' concerns seem to have increased as political risks have dominated the headlines. The chance of a no-deal Brexit and the intensifying U.S.-China trade war are increasing uncertainty and affecting growth prospects. Also in July, the Fed specifically cited "the implications of global developments" as part of their rationale for the first rate cut since the tightening cycle began in December 2015.

      Against this backdrop, global bond yields have declined in 2019. According to Deutsche Bank, $15 trillion of worldwide government bonds have negative yields. This is roughly 25% of the global market.

      After flirting with a 3.25% yield in November 2018, the benchmark 10-Year Treasury yield has declined as U.S. inflation data proved tame and global growth slowed. The pace of the yield decline has accelerated as investors have sought out the safety of fixed income. The 10-Year Treasury yield finished July at 2.015% and has declined an additional 26 basis points (bps) to 1.74% in the seven days since.

      The municipal market has followed along. Yields have dropped all along the benchmark curve, down from 79 bps (year-to-date as of 8/7/19) in the 2-year maturity to 97 bps in 20-year maturity, and they are fast approaching all-time lows. Individual investor demand for tax-exempt income has remained strong with year-to-date (as of 7/31/19) fund flows of nearly $53B, which is a record. Conversely, supply has been limited. In 2018, 46 states saw year-on-year declines in supply. Many saw double-digit percentage declines. Most notably, New Jersey in 2019 is experiencing a year-on-year decline of 53%!

      What is a municipal bond investor to do? Remain calm and remember why municipals should be part of a balanced portfolio. The certainty and definition that fixed income securities provide should be particularly appealing when investors are looking to manage hard-to-quantify risks like political risk. For taxable accounts, municipals usually offer the most attractive risk-adjusted after-tax yields in fixed income (though consulting a tax advisor before making a commitment is a good idea). Investors do not have to look further than Q4 2018 to appreciate the virtues of owning an asset that does not correlate with equities.

      Bottom Line: Considering the global environment, tax-exempt yields could continue to move lower, but investors should be thoughtful in their approach to the market. If investors anticipate a correction, they might want to consider using a defensive portfolio structure like a ladder. Alternatively, if we stay in this environment, they might consider an actively managed portfolio that can generate additional return (alpha). Either way, accessing the resources of a professional manager can help investors to navigate a difficult market.

      As interest rates rise, the value of certain income investments is likely to decline. Investments in debt instruments 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.