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So far in 2019, municipal bonds see record inflows

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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 Michael J. Sullivan, CFA, Institutional Portfolio Manager, Eaton Vance

      Boston - With equities experiencing another round of volatility, investors are wisely focusing on the necessity of diversification and capital preservation. Additionally, the tax-exemption value muni bonds provide in light of the SALT deduction cap remains on the forefront of investors' minds post tax reason. The combination continues to drive strong flows into separately managed accounts and municipal mutual funds. Muni mutual funds alone have witnessed inflows over $29 billion during the first quarter of 2019, the best start to a year on record according to Morningstar (U.S. Fund Flow Trends in First-Quarter 2019, Morningstar, 04/29/19).

      In April, munis extended their strong run with a sixth consecutive month of positive performance. The Bloomberg Barclays Municipal Bond Index posted a monthly return of 0.38% and a year-to-date return of 3.28%, its best start since 2014. Corporate bonds also continued a winning streak with the Bloomberg Barclays U.S. Corporate Investment Grade Index delivering a monthly return of 0.54%.

      Sweet Spot

      We favor short-to-intermediate-term maturities for their attractive absolute yields and limited interest rate risk. Munis on the short range of the curve are slightly rich compared to taxable alternatives, though even at current levels munis still offer value for individual investors in the highest tax brackets and are likely to remain well supported. In the current environment, muni buyers do not need to venture too far out on the curve to achieve a majority of the yield that is being offered. In fact, as of April 30, a muni investor may be able to capture 86% of the yield available on the 30-year yield curve by going out just 15 years, and 64% by simply going out five years.

      Bottom line: Municipal bonds with short-to-intermediate-term maturities are offering attractive absolute yields and limited interest rate risk.

      The Bloomberg Barclays Municipal Bond Index is an unmanaged index of taxable municipal bonds traded in the U.S.

      Bloomberg Barclays U.S. Corporate Investment Grade Index is an unmanaged index that measures the performance of investment-grade corporate securities within the Barclays U.S. Aggregate Index.

      Bloomberg Barclays US Treasury Index measures public debt instruments issued by the U.S. Treasury.

      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.