Mutual Funds

The Federal Reserve (the Fed) kept its policy rate steady at 4.50% during their March meeting, citing strong economic data with unemployment at 4.1%, Gross Domestic Product (GDP) growth for 2024 hitting 2.5%, and inflation moderating above target also at 2.5% year-over-year.  However, their updated projections for 2025 showed slower growth, a rise in unemployment, and an increase in inflation expectations.  The Fed is taking a “wait-and-see” approach as President Trump’s tariff plans are implemented, spending cuts are made, and extension of the 2017 tax cuts are considered.  The Fed also decided to slow its balance sheet runoff by reducing Treasuries purchases, while leaving the cap on agency mortgage securities unchanged.  The Treasury curve flattened while the municipal (muni) curve steepened during the quarter.  The 10-year Treasury yield dropped 36 basis points (bps) from 4.57% to 4.21% while the 10-year muni yield rose 20 bps from 3.06% to 3.26%.  The 10-year muni/treasury ratio increased to 77%.  Demand for municipal bonds stayed healthy, supported by $9.8 billion in net fund inflows year-to-date, according to JP Morgan.  The supply of tax-exempt debt remained strong, with $119 billion issued in Q1.  New issuance is up almost 14% year-over-year.  Refunding deals made up 25% of new supply and taxable supply comprised 6%.  Credit spreads ended slightly tighter quarter over quarter.  In Q1, long-term maturities underperformed shorter ones, and lower-quality bonds continued to be in favor over higher-quality ones.

For the first quarter, The Commerce National Tax-Free Fund’s return of +0.15% underperformed the Bloomberg 3-15 Year Blend benchmark of +0.33%.  Short durations were the most additive.  The Fund’s exposures to the Industry Development Revenue (IDR)/Pollution Control Revenue (PCR), housing, and not-for-profit sectors performed the best.  Water/sewer, limited tax and higher education sectors detracted.