Dear Shareholder:
Financial markets bounced around like a ping pong ball during the first quarter. The volatility was pronounced and impacted virtually every asset class, including U.S. Treasuries and investment grade municipal bonds, which are typically seen as safe haven assets. Among other things, a narrowly averted government shutdown, on-again off-again tariffs, federal job layoffs, pending tax reform, and continued geopolitical uncertainty led to a general risk-off sentiment. For the 3-month period ending March 31, the Bloomberg Municipal Bond Index provided a total return of -0.22%.
At its mid-March meeting, the Federal Reserve (“Fed”) left the fed funds target range unchanged at 4.25%-4.50%. The Fed observed that the economy continues to expand at a solid pace but also that “uncertainty around the economic outlook has increased.” This represented a change from prior Fed statement language which noted that “risks to the outlook were roughly in balance.” The Fed cut its median GDP forecast from 2.1% to 1.7% for this year and also revised its near-term inflation forecast upwards from 2.5% to 2.8%. The Fed made it clear that it expects heightened uncertainty and slower economic growth this year, as well as a “transitory” increase in prices (most likely due to tariffs). The Fed’s revised forecast raises the question of whether a “stagflation” scenario might take hold where a combination of slower growth, higher unemployment, and rising prices hampers the economy.
In addition to policy uncertainty, a higher than normal level of municipal bond issuance during the first quarter also negatively impacted municipal bonds. Issuance during the first quarter was significantly above the trailing 3-year average. Many states and municipalities have increased their bond issuance in anticipation of reduced federal aid. Demand for tax-exempt bonds declined slightly, which was likely due to increased uncertainty. The resulting supply/demand imbalance led to lower municipal bond prices.
Credit quality in the municipal bond market continued to hold up well; however, some riskier sectors such as senior living, charter schools, small private colleges, and smaller rural hospitals are facing increasing challenges. We routinely avoid buying (with a few exceptions) in these sectors, so we have little to no exposure to these riskier bonds. The credit quality of all of our investment portfolios remains very strong.
On a housekeeping note, we have a number of shareholders who still receive dividend and redemption checks via the U.S. Postal Service. Recently, we have experienced a marked increase in the delivery time for mail sent to shareholders. Accordingly, I want to remind you of the available account option to link your Dupree Mutual Funds account directly to your bank account. Once linked, it allows us to send dividend and redemption proceeds quickly (funds usually arrive the next business day) and securely via the ACH system to your bank without incurring any charges. We can also pull funds directly from your bank account if you would like to purchase additional fund shares. Please call us if you would like to learn more about this convenient account feature.
As always, we appreciate your business. Thank you for investing with us.
Sincerely,
Allen E. Grimes, Ill President