Ultra Short Tax-Free Income Fund Commentary
The third quarter was fairly quiet in the short end of the municipal market, as yields remained muted due to the continued theme of solid supply offset by steady inflows into municipal bond funds. It’s evident that many investors are willing to accept lower yields in anticipation of rates rising in the lower end during the coming months once the Federal Reserve begins tapering its purchase program. As a result of the demand on the short end, the SIFMA index, which is an average of variable rate demand notes (VRDNs), was 0.02% for the entire quarter until the last week of September, when it moved up to 0.05%. Yields in the 1-year fixed rate market were similarly range-bound throughout the period, with a slight uptick at the end of the quarter.
Positioning the Ultra Short Tax-Free Income Fund
Portfolio composition is subject to change.
Given the low VRDN yields, the Fund reduced its exposure to that sector while increasing its fixed rate holdings. The Fund will continue to look for opportunities in the fixed rate market going forward as well, as the Fed has reiterated its stance of keeping the overnight lending rate near zero for the foreseeable future.
Notable Changes to the Portfolio
As mentioned above, the Fund shifted its investment mix by extending duration through the purchase of fixed rate bonds while reducing its VRDN exposure.
Why should investors consider investing in this Fund?
While yields in the short end of the fixed income markets are low, we believe municipal bonds continue to offer value on a tax-equivalent basis and the Fund is relatively stable from a net asset value perspective, which is especially important if rates begin to rise.
An investor should consider a fund’s investment objectives, risks and charges and expenses carefully before investing or sending money This and other important information about an investment company can be found in the fund’s prospectus. To obtain a Cavanal Hill Funds prospectus or summary prospectus, please call 800-762-7085 or visit us at www.cavanalhillfunds.com. Please read it carefully before investing.
Not FDIC Insured | No Guarantee | May Lose Value