Quarterly Update

William D. Black, Managing Director, Senior Portfolio Manager | Jan. 2021

High Yield Municipal Bonds Turn the Page on 2020

A recovering economy supports credit quality

Relative value opportunities persist

Federal policy accretive to the market

High yield municipal (HYM) bonds recorded strong quarterly performance to close out an otherwise volatile year for the economy and financial markets. According to Bloomberg Barclays Indices, HYM bonds booked approximately 1.9% of return during December, versus a far weaker performance of 61 bps for the broader market. Outsized performance can be rationalized by tightening credit spreads, mounting cash availability driving investment needs and a willingness to take on selective credit risk. We expect credit concerns to persist at least through the first quarter of 2021, yet, despite high caseloads, the public health policy environment should improve, while the prospects for additional fiscal relief support a more constructive economic outlook that bodes well for credit sentiment. Against this backdrop, HYM bonds should reward investors with stable income and moderate tax-adjusted returns between 5%-7% in 2021.

A continuation of technical support for HYM bonds, such as light issuer supply and positive mutual fund flows, coupled with the relative value proposition versus other asset classes, should continue to benefit investors. We expect HYM bonds to fare well against their investment grade counterpart at least over the near term as the spread differential between the two segments offers an opportunity for incremental performance, particularly given our estimates for economic growth in 2021. While a large-scale credit incident, such as a default by a well-known issuer, or rising rates, could lead to a redemption cycle and weaker valuations, we view these events as potential opportunities to take advantage of credit and sector distinctions within the market.

With a Democratic majority in Congress, the Biden administration's policy agenda will likely prioritize the need for further stimulus to counter the pandemic's implications. A fair assessment that direct and indirect aid to municipal sectors is more likely under the new political regime bolsters issuers' fundamental credit quality. Discussions to revisit the Tax Cuts and Jobs Act of 2017, such as rolling back the changes to individual and corporate tax rates, could elevate the desirability for tax efficiency, thus raising municipal bond demand. We also expect bipartisan efforts to enact an infrastructure investment program, positively impacting specific sectors within HYM bonds, such as public/private partnerships. Policy initiatives should provide a tailwind to credit and technical underpinnings in the market this year.

Key Points

A recovering economy supports credit quality

Relative value opportunities persist

Federal policy accretive to the market

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Important Disclosures

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

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Alternative investments are speculative, entail substantial risks, offer limited or no liquidity, and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying and lengthy lockup provisions. Please see the Offering Memorandum for more complete information regarding the Fund’s investment objectives, risks, fees, and other expenses.

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There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

Alternative investments are speculative, entail substantial risks, offer limited or no liquidity and are not suitable for all investors. These investments have limited transparency to the funds’ investments and may involve leverage which magnifies both losses and gains, including the risk of loss of the entire investment. Alternative investments have varying, and lengthy lockup provisions.

CNR is free from any political affiliation and does not support any political party or group over another.

Index Definitions

Bloomberg Barclays Municipal Bond Index is a market-value-weighted index for the long-term tax-exempt bond market. To be included in the index, bonds must have a minimum credit rating of Baa. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least 1 year from their maturity date.

The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market.

Indices are unmanaged and one cannot invest directly in an index.

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