4th Quarter 2018

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Is Jerome Powell Donald Trump’s Lex Luthor? Or Joker? Or Thanos? Whichever supervillain you like best. Perhaps the analogy goes the other way around and Trump is Powell’s supervillain. Either way, it seems the president of the United States and the chairman of the U.S. Federal Reserve are locked in an epic battle over the fate of the U.S. economy.

Hyperbole aside, President Trump has seemingly begged, cajoled, and otherwise threatened Powell in an effort to stop the Fed from raising interest rates. Trump has gone so far as to blame stock market turmoil solely on the Fed’s actions. Those comments, along with equity market volatility, and perceived macroeconomic weakness, have led the market to discount the probability that the Fed continues to hike rates in 2019. Does that mean Trump won? Maybe, but like any good superhero/villain, you can’t be sure Powell won’t return in the next act.

The Fed’s dual mandate is well known: pursue sustainably low unemployment and inflation around 2%. By those metrics, the Fed is a rousing success and has been for some time. And yet Powell— and Janet Yellen before him—has pushed rates higher. Why? Why would he take any action if, by every available measure, the Fed has already accomplished its goal? Either Powell is a supervillain, or he believes the Fed needs to be preemptive because monetary policy implementation involves “long and variable lags,” or perhaps he thinks the Fed’s job entails more than the dual mandate.

Powell seems acutely aware of the quandary that the Fed created in response to the financial crisis with a zero- interest-rate policy and “quantitative easing” asset purchase program. For years, those two stimulus initiatives pushed investors out the risk spectrum, leaving the safety of money market funds offering zero-percent yields in search of income in riskier and riskier asset classes. If Powell believes the job of the Fed extends beyond the dual mandate and includes the overall health of the U.S. macroeconomy, then he must be concerned with the disconnect between investors’ current asset allocations and risk profiles.

The easiest way to fix the issue with investors’ imprudent risk taking is to provide them with attractive investment options that offer lower risk profiles. And the easiest way to do that is to continue pushing rates higher.

Who knows whether the Fed will raise rates once, twice, or not at all in 2019. What we can ascertain is that Powell believes rates need to be higher for reasons beyond managing inflation and employment. He appears biased toward higher rates and, so far, he hasn’t seemed to let equity market volatility dictate interest rate policy. As a result, he will remain Trump’s nemesis. More importantly, investors should not discount the possibility that the Fed continues to lift rates, potentially extending the recent volatility into 2019 after the market’s long placid stretch.

Luckily, we have a rough template for how to handle volatility as it reared its head in the fourth quarter of 2018. As we’ve mentioned in previous commentaries, the Thornburg municipal bond portfolios have been positioned in their bearish ranges from a risk perspective for some time. Credit quality, cash, and reserve positions were higher while durations were lower. The idea being that compensation for risk was largely inadequate, and better opportunities were on the horizon.

The fourth quarter presented some of those opportunities as rates moved up and investors began removing money from the municipal bond asset class to harvest tax losses. Although we didn’t see enough evidence to materially extend duration or lower credit quality, we were compelled to lower reserve positions by trading out of variable rate demand notes and into municipal bonds primarily with maturities inside of five years. It’s worth noting that money market funds have a narrow investment universe that does not allow for that type of relative-value trade.

Those trades proved valuable as performance across all the products raced higher, highlighted by the I-share class of Thornburg Limited Term Municipal Fund posting a 0.74% return for the month of December. Rates have since drifted downward again and the market appears to be entering another brief period of calm. We’ll see.

In the meantime, our funds remain very flexible with lower durations, higher credit qualities and liquidity. They are further bolstered by the organic cash generation from our actively managed ladder structure. We will continue to operate under our simple philosophy: Take risk when being compensated to do so. The year ahead may provide more opportunities to do interesting things, but until that happens we will continue to manage our strategies prudently, particularly when the two occupants of the Fed’s Eccles Building and the Oval Office are apparently at odds.

We look forward to what we suspect will be another exciting year. Thank you for your continued trust and investing alongside us in the Thornburg Municipal Funds.

Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than quoted. For performance current to the most recent month end, see the mutual funds performance page or call 877-215-1330. The Low Duration and Limited Term funds have a maximum sales charge of 1.50%. The Intermediate Municipal Fund and the Strategic Municipal Income Fund have a maximum sales charge of 2.00%.

Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit thornburg.com. Read them carefully before investing.

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 12/31/18.

Investments carry risks, including possible loss of principal. Portfolios investing in bonds have the same interest rate, inflation, and credit risks that are associated with the underlying bonds. The value of bonds will fluctuate relative to changes in interest rates, decreasing when interest rates rise. This effect is more pronounced for longer-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. Investments in lower rated and unrated bonds may be more sensitive to default, downgrades, and market volatility; these investments may also be less liquid than higher rated bonds. Investments in derivatives are subject to the risks associated with the securities or other assets underlying the pool of securities, including illiquidity and difficulty in valuation. Investments in the Fund are not FDIC insured, nor are they bank deposits or guaranteed by a bank or any other entity.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Class I shares may not be available to all investors. Minimum investments for the I share class may be higher than those for other classes.

Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.

Income earned from municipal bonds is exempt from regular federal and in some cases, state and local income tax. Income may be subject to the alternative minimum tax (AMT).

There is no guarantee that the Fund will meet its investment objectives.

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Thornburg mutual funds are distributed by Thornburg Securities Corporation.

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