The bond market keeps going and going in 2010. The high-quality domestic bond market delivered another quarter of good performance with the Barclays Aggregate Bond Index returning 2.5% for the quarter and 7.9% year-to-date through the end of September. We expect performance to slow during the fourth quarter as the now even lower level of yields implies lower returns going forward. However, the Federal Reserve (Fed) may provide an additional catalyst should the central bank expand bond purchases in an attempt to stimulate the economy and we see limited bond market weakness over the fourth quarter.

A Rising Tide Lifts All Boats

Virtually all sectors of the bond market benefited from the decline in bond yields and corresponding rise in bond prices.  A steady decline in interest rates provided the bond market with a nice tailwind over the third quarter.  Intermediate and long-term bond prices benefited most from the decline in yields while short-term bond returns were more muted due to already rock bottom short-term interest rates that failed to match the decline in intermediate and long-term yields. Among government bond sectors, Mortgage-Backed Securities (MBS) lagged as fears over a refinancing wave led to price weakness later in the quarter.

More economically sensitive High-Yield Bonds and Emerging Market Debt (EMD) outperformed high-quality bonds during the period.  Credit quality fears from the European debt problem subsided over the summer prompting investors to refocus on strong underlying fundamentals and attractive valuations. Demand from income-seeking investors also benefited both sectors. Foreign bonds, un-hedged for currency movements, performed well as the Euro rebounded and debt fears subsided.

Performance in the municipal bond market paralleled that of the taxable bond market. High quality intermediate and long-term bonds outperformed short-term bonds while municipal high-yield bonds outperformed high-grade tax-free bonds. Even though the drumbeat of warnings about municipal credit quality continued, investors recognized the high-priority status of most municipal bond interest payments. Attractive valuations also benefited tax- exempt bonds.

As we look to the fourth quarter, we expect bond market performance to slow. The benign Federal Reserve and low inflation environment that benefited bonds during the third quarter looks set to continue; however, we believe the now lower level of high-quality bond yields already reflects this favorable backdrop.  Bond prices may remain relatively range-bound as Fed policy and economic data unfolds.  Interest income, and not price appreciation, therefore will be a greater driver of bond returns over the fourth quarter in our view.

High Yield Bonds Still in Favor

We continue to favor more economically sensitive bond sectors such as High-Yield Bonds, investment-grade corporate bonds, and EMD. Domestically, second quarter earnings reports revealed that debt issuers continued to improve key credit quality metrics. On average S&P 500 companies increased their interest coverage ratio and reduced leverage further. Late in the quarter Moody’s Investor Service reported that U.S. corporations have been actively refinancing existing debt maturities. The amount of high-yield and investment-grade corporate debt due between mid-2010 and the end of 2012 declined 37% and 18%, respectively. Not only does refinancing higher interest debt potentially bode well for improving the ability to service debt, but it also gives corporations the ability to avoid volatile markets and issue debt with uneconomical terms.

The high-yield market continued to benefit from a sharp decline in defaults, a trend we expect to continue over the fourth quarter. The Moody’s 12-month trailing default rate declined to 5.0% at the end of August with Moody’s forecasting a further decline to 2.7% through year-end 2010. With an average yield advantage of 6.4% above comparable Treasuries as of September 22, 2010, we believe valuations more than compensate investors for the risk of default.  Additionally, the average 7.9% yield-to-maturity is attractive in what could be a very low return environment for bonds.

Emerging market countries continue to exhibit stronger economic growth. Stronger economic growth bodes well for continued credit quality improvement and an enhanced ability to service debt obligations. The International Monetary Fund (IMF) forecast that EMD issuers on average will continue to reduce their debt burdens relative to the size of their economies, as measured by debt-to-GDP ratios, through 2015. Not surprisingly, the IMF forecast debt burdens of developed countries would continue to increase over the same period. The stronger fiscal position bodes well for EMD. However, similar to high-quality bonds, we expect the bulk of future performance to come from interest income generation as we find valuations attractive but close to fair value.

A double-dip recession is a risk to our preference for more economically sensitive bonds. A return to recession would likely lead to still higher high- quality bond prices and additional gains.  However, a double-dip recession would likely lead to underperformance of more economically sensitive bonds such as high-yield bonds and EMD.

Conversely, a sharp rise in interest rates could lead to bond price declines and the possibility of negative total returns. We place a low probability on such a scenario as the Fed remains committed to keeping interest rates low for an “extended period” and may err to the side of providing additional stimulus via expanded bond purchases. Even if the Fed does not announce additional bond purchases at its November policy-making meeting, it will likely state that they stand ready to take additional action as necessary to stimulate the economy which will keep the prospect of bond purchases alive. Although a decline in yields in response to Fed buying is far from certain, the prospect of Fed purchases, slow growth, and low inflation will likely keep any bond price weakness limited.

Like high-quality taxable bonds, we believe high-quality municipal bond performance may slow as average AAA-rated municipal bond yields are near historic lows.  Signs of weakness appeared late in the quarter as a surge in new issuance met lukewarm demand. Low yields caused investors to hesitate and if bond dealers cut prices to move recent new issues, a modest sell-off may ensue. On a positive note, valuations relative to Treasuries remain attractive with longer-term AAA-rated Tax-Free Bonds yielding more than taxable Treasuries. On a longer-term view, a supply-demand imbalance remains in effect with tax-exempt bond issuance on pace to finish 2010 at the lowest level in almost a decade.

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IMPORTANT DISCLOSURES

• The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
• Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, are subject to availability, and change in price.
• Mortgage-Backed Securities are subject to credit, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk.
• Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.
• Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government.
• High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
• The market value of Corporate Bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
• Preferred Stock investing involves risk, which may include loss of principal.
• International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
• Investing in foreign securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
• Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
• Bank Loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.
• Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between  companies and industries because it eliminates the effects of financing and accounting decisions.
• This Barclays Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

photo credit: Beverly & Pack

Central banks have taken on a renewed focus for corporate bond investors given China’s recent moves to tighten monetary policy. Over the past two weeks, concerns over policy tightening in China have led to US Treasuries outperforming more credit sensitive corporate bonds. This week, all eyes shift towards the Federal Reserve’s Federal Open Markets Committee (FOMC) meeting. While an interest rate change is not expected, investors will closely scrutinize the FOMC’s statement for any movement towards an exit strategy and removal of monetary stimulus. If the Fed takes a step towards removing stimulus, investors may view the economy as being at risk for a possible “double dip” recession and thus question the future creditworthiness of corporate bonds.

photo credit: George E.Martin

A look back at prior episodes of Fed monetary-policy tightening reveals that corporate bonds, both investment-grade and high-yield, continued to outperform Treasuries following the start of interest rate hikes in 1994 and 2004. Visually, the easiest way to see the out-performance of corporate bonds is to view the change in yield differentials, or spreads, to Treasuries. A narrower yield spread reflects stronger investor preference for corporate bonds, while a wider yield spread reflects weaker demand for corporate bonds and stronger demand for Treasuries.

In 1994, high-yield bond spreads contracted through the first Fed rate increase before leveling off and then rising before finishing slightly narrower a full year after the Fed’s first rate increase. The continued improvement is even more pronounced among investment-grade corporate bonds where yield spreads steadily contracted following the first rate hike. [Chart 1] Narrower yield spreads translated into out-performance with investment grade corporate bonds and high-yield bonds outperforming treasury bonds by 0.4% and 1.2%, respectively, as measured by Barclays Index data, for the subsequent 12 months after the first Fed rate increase. While the knee-jerk market reaction to a Fed rate increase is often negative, it usually reflects the Fed’s belief that the economy is strong enough to withstand higher interest rates. However, a strong economy is also reflected in corporate bond issuers improved profitability and greater cash flow to service debt payments, both positives for bondholders. Corporate and high-yield bond performance is even more impressive considering the Fed’s aggressive rate hike campaign, which took the target Fed Funds rate up a full 3.0% to 6.0%
from January 1994 to January 1995.

Corporate Bonds and High-Yield Bonds Spreads Contract

Similarly, investment-grade corporate bond and high-yield bond spreads contracted over the 12 months following the Fed’s first-rate increase in June 2004 [Chart 2]. Investment-grade corporate bonds and high-yield bonds outperformed Treasuries by 0.5% and 4.6%, respectively, over the same time period. Again, investor confidence in the economy and improving fundamentals for corporate bond issuers led to out-performance despite steady rate hikes by the Fed. In 2004, corporate bonds were aided by the Fed’s more gradual approach of steady 0.25% rate increases rather than the occasional 0.50% increase utilized in 1994. The target Fed Funds rate increased by 2.0% from June 2004 to June 2005 compared to the 3.0% rise over the January 1994 to January 1995 period. The story was different in 1999, as yield spreads widened and corporate bonds underperformed following the onset of Fed rate hikes. However, in 1999, we believe a unique set of circumstances conspired against corporate bonds:

• First, the Asian crisis during the fall of 1998 put corporate bond investors on edge. Fear of “contagion” to the rest of the world left little room for error. Still, corporate bond spreads narrowed up until the first rate increase in May 1999 as investors refocused on strong domestic economic growth. The economy grew at a 7.1% rate in the fourth quarter of 1998 as measured by GDP.
• Second, a budget surplus prompted discussions of a Treasury buyback program in the fall of 1999. In January 2000, the Treasury announced its buyback program helping Treasuries outperform in a very difficult bond environment.
• Lastly, Fed rate hikes in 1999 came late in the business cycle following a nine-year expansion. With the Fed Funds rate already elevated at 4.75%, rate increases were viewed negatively for the future financial health of corporate bond issuers.

As the economy likely emerged from the Great Recession during the third quarter of 2009 and with the Fed Funds target rate at a historic low, we believe today’s environment is different from that of 1999. A new economic expansion is underway globally and we expect the Fed will wait until late 2010 to raise interest rates. The Fed has also employed a greater range of policy tools this time, including the use of special funding facilities and bond-purchase programs. We believe the Fed will continue along the path of winding these programs down before increasing interest rates. In sum, the Fed is likely to take a “wait and see” approach to nurture the budding recovery and not risk tipping the economy back into recession.

We find the current period to be more similar to the 2004 period. Current yields are at similar levels and the target Fed funds rate was not much higher than today’s rate. Therefore, the corporate bond investors should not fear potential Fed rate increases. Fed rate hikes will likely lead to lower overall bond market performance but we continue to believe that corporate bonds, high-yield in particular, will help lead performance within the bond market. While Federal Reserve interest rate increases are to be taken seriously, investors need to weigh the reasons for the rate increase: most notably a stronger economy that has likely translated into better creditworthiness of corporate borrowers. At a time when government indebtedness of developed countries is reaching unprecedented levels, we continue to favor high-yield and investment-grade corporate bonds despite the possibility of eventual Fed interest rate increases.

IMPORTANT DISCLOSURES

• This was prepared LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
• Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fi xed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
• The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
• Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
• High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.
• International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
• Stock investing involves risk including loss of principal.
• Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlines in the prospectus.

High Yield Bonds have outperformed again in October adding to impressive year-to-date gains, as measured by the Barclays High Yield Bond Index. The strength in the market has led to record performance and eye popping total returns are causing investors to logically question, “is it over?” We do not believe it is over as valuations still look attractive and fundamental data continues to improve. Data on arguably the most important factor, defaults, suggests the favorable backdrop will persist for the high yield market.

When assessing the high yield bond market, default data is the most important fundamental driver. Both major ratings agencies, Moody’s and S&P, track defaults among companies rated below investment grade and publish their fi ndings monthly. Not only do they track current and past defaults but each firm reports their expectations for future defaults. While the level of defaults is high now, 12% according to Moody’s, it is a running total of the past 12-months and therefore a backward looking measure. Even within this backward looking measure there is cause for optimism as the number of
companies defaulting declined to 50 during the third quarter down from 83 during the second quarter and 89 during the first quarter.

However, the ratings agencies publish default forecasts and these are of more importance to forward looking markets. Last week S&P forecast the default rate would fall to 6.9% by September 2010, a sharp reduction versus their prior expectation of 13.9%. The news gave the high yield market a lift. S&P’s forecast is now more inline with that of Moody’s who had already forecast a drop in the default rate to 4.5% by September 2010. The S&P forecast is inline with that of other Wall Street analysts calling for a decline in defaults to 4.5% to 5.5% over the coming 9 to 12-months.

Default Beware

The default rate is perhaps the key driver of high yield bond valuations hence its importance. Higher defaults will cause investors to demand a lower price/ higher yield to compensate for default losses. The higher the expectation for defaults, the cheaper (or lower) high yield bonds are priced and vice versa. Historically the average high yield bond yield advantage over Treasuries, or spread, is highly correlated with the default rate.

Given the tight relationship, a continued decline in the default rate bodes well for the high yield market and suggests that there is still room for additional yield spread contraction. For example, if defaults do decline to 4.5% to 6.0% then yield spreads could contract to 6.0% to 6.5%, based upon the historical relationship between defaults and yield spreads, down from a current level of 7.7%. The prospect of additional yield spread contraction is particularly important given the improvement that has already occurred in other segments of the bond market. In other words, further declines in the default rate provide a tailwind for high yield bonds and help generate additional return.

The high yield market also offers higher yields, something that is becoming increasingly important. Yields on Treasuries and Mortgage-Backed Securities (MBS) are at or near historic lows. Investment grade corporate bond yields are at their lowest levels of the past four years. As the pace of improvement for many fixed income sectors slows, interest income will play a much greater role in driving performance going forward. The average yield of high yield bonds is 10.0%, slightly below its long-term average of 11% but well above the 2004 low of 6.7%.

Yields Are Attractive

The attractive yield should continue to attract demand from investors. The average high yield bond still possesses a large yield advantage to money market investments. The current yield advantage is down but above the 2002 peak, which was another opportune time to buy high yield. The sector has benefited from investors switching out of cash and with over $3 trillion still sitting in money market instruments, will likely continue to do so. While we remain favorable on the high yield market there are still risks to consider. Year to date new issuance has totaled $133 billion, more than twice the 2008 total of $53 billion according to Bloomberg. A smoothly functioning new issue market has been a key factor in driving the default rate lower. Many companies have been able to refinance debt obligations and lower interest expense or restructure near-term maturities. Should the new issue market falter and companies not be able to issue new debt or refinance existing debt, default risk would increase. A “double dip” recession would also be a risk but we expect the economy to continue to expand at a modest pace. Economic growth, even at a modest pace, should provide a favorable
backdrop for high yield issuers.

Absent a sharp decline in economic activity (which we do not expect) or a quick reversal in default expectations we expect to continue to hold high yield bonds well into 2010. Should yield spreads contract to a level that fully reflected the decline in defaults we would consider exiting the high yield bond market. Alternatively if high quality bond yields rose substantially to provide attractive return opportunities we might also consider switching out of high yield bonds. We do not expect either condition but these are the signposts we are watching.

So while the high yield bond market has had an impressive run in 2009, we believe fundamentals outweigh risks and bode well for additional positive return. To be sure, 2009 total return should be viewed in the context of an extremely depressed 2008. We believe the bulk of the gains are behind us and the now higher valuations suggest the pace of performance will slow.

We still view the sector as the most attractive in fixed income. In a world of lower yields and higher valuations, high yield bonds still offer both attractive valuations and yields. The run is not over for high yield bonds.

IMPORTANT DISCLOSURES

• This report was prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
• Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fi xed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
• The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
• Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
• High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.

After a strong start to August, Corporate Bonds, both Investment-Grade and  High Yield, have underperformed Treasuries over the past two weeks. For the two weeks ending August 21, investment grade corporate bonds and high yield bonds underperformed Treasuries by 0.43% and 2.14%, respectively, according to Barclays data, after stripping out the impact of interest rate movements. Recent underperformance did little to dent the massive  performance lead corporate bonds possess on a year-to-date basis.

Yield spreads to Treasuries widened but remain near early August levels. For  high quality investment grade corporate bonds, the average yield spread to comparable Treasuries widened a relatively modest 0.1% to 2.5%. Although  it resembles only a blip up on the chart, it still represents the only pullback of its kind in what has been a nearly uninterrupted run of  narrower yield spreads since March.

Spread on High Yield Bonds

High Yield Bond spreads to Treasuries widened more, so far similar to what investors witnessed in June when wider yield  premiums to Treasuries reflected concern over rising Treasury yields (the 10-year Treasury yield touched 4%) and concerns over the coming earnings  season. Given the 2.2% gain in the S&P 500 Index last week, the pause in  corporate bond markets is at odds with the equity market, causing investors  to question whether the corporate bond rally is over. But recall that while  corporate markets have recovered to pre-Lehman collapse levels, equities  have not.

We remain positive on investment grade corporate bonds and high yield  bonds, thanks in part to the second quarter earnings season. For the S&P  500, second quarter earnings were down 28% year-over-year, versus  an expectation of down 36%. Although weak on an absolute basis, the  improving trend is a positive for forward looking corporate bond markets.  The majority of the earnings surprise came from cost cutting, but this is a  positive for corporate bond holders. Once corporations embark on a path of  repairing balance sheets, the benefits can accrue to bondholders for years.   Note how credit  quality improvements, reflected in narrower yield spreads, persist for long  periods of time.

Corporate bond fundamentals may get an additional lift from better  economic prospects for the second half. Consensus GDP forecasts for the  third quarter have revised up to the 2.0–3.0% range, up from zero, and  estimates for the forth quarter have been revised 0.5% to 1.0% higher as  well. While we would label fundamentals as still weak overall, earnings  season and prospects for economic growth are encouraging signs for  fundamentals improving going forward.

Valuations still attractive

Perhaps most importantly, Corporate Bond valuations still look attractive and  the investment thesis of investors being paid to wait is still very much valid. At a 2.5% yield advantage to Treasuries, investment corporate bond yield  spreads are still 1.0% above the historical average. The 2.5% yield advantage is more impressive considering a 10-year Treasury yield under 4%. The  yield advantage creates a high hurdle for government bonds to outperform

High Yield Corporate Bonds

photo credit: serhio

In the high yield market, the current yield spread of 9.1% remains well above the 5.5% average. Defaults continue to rise in the high yield market, with Moody’s forecasting defaults to peak at 12% in the fourth quarter, while  S&P has forecast a peak default rate of 14% for the first quarter of 2010. While alarming on the surface, the estimates have come down over the past  couple of months, and investors are looking past the peak toward a decline  in default rates in 2010. High default rates will likely keep yield spreads  above historic norms well into 2010 and perhaps beyond, but that still leaves  an impressive yield advantage.

Risks

New issuance could create a supply burden for corporate markets. With  absolute yields on Investment-Grade Corporate Bonds now down to an  average of 5.3%, the low end of the historical range, corporate treasurers  may be motivated to take advantage of low yields to issue debt. Greater  supply may be a challenge given narrower yield spreads. However, still-high cash balances at many corporations and weak capital spending argue against  a pick up in new issuance. This is less of a factor in the high yield market  where an average yield 11.5% is in the middle of the long-term range. For  High Yield Bonds, defaults and the degree they surprise both to the up or  downside of expectations will play a greater role.

Conclusion

The easy money in Corporate Bond markets has already been made, but  we believe corporate bonds can still provide additional out performance. In sum, we believe there is still room for improvement as yield advantages to  Treasuries remain high relative to historic norms. History has shown that  over long periods of time, credit quality improvements benefit bondholders  for years. Improvement is likely to come more gradually going forward, however, and bouts of weakness, such as what investors witnessed over  the past two weeks, should not surprise investors. We would use such weakness to add to existing positions, as we continue to find corporate  bonds attractive.

Carnivals of the Week

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IMPORTANT DISCLOSURES

• The opinions voiced in this material are for general information only and are not intended to provide specific  advice or recommendations for any individual. To determine which investment(s) may be appropriate for you,  consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of  future results. All indices are unmanaged and cannot be invested into directly.
• Neither LPL Financial nor any of its affi liates make a market in the investment being discussed nor does LPL  Financial or its affiliates or its officers have a financial interest in any securities of the issuer whose investment  is being recommended neither LPL Financial nor its affiliates have managed or co-managed a public offering of  any securities of the issuer in the past 12 months.
• Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of  principal and interest and, if held to maturity, offer a fi xed rate of return and fi xed principal value. However, the  value of funds shares is not guaranteed and will fluctuate.
• The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield  may differ from the advertised yield.
• Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest  rates rise and are subject to availability and change in price.
• High Yield/Junk Bonds are not investment grade securities, involve substantial risks and generally should be  part of the diversifi ed portfolio of sophisticated investors.
• GNMA’s are guaranteed by the U.S. government as to the timely principal and interest, however this guarantee  does not apply to the yield, nor does it protect against loss of principal if the bonds are sold prior to the  payment of all underlying mortgages.
• Muni Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as  interest rates rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other  state and state and local taxes may apply.
• Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry  sectors have additional risks, which are outlines in the prospectus.
• Stock investing involves risk including loss of principal.