"Low Duration Municipal Fund is a short-term ladder with a duration around 1.5 years. The fund offers two great advantages: it aims for a very stable net asset value, making it attractive for those with a short investment horizon, and it's positioned to quickly take advantage of any increases in short-term interest rates. If short rates rise, as is widely expected by economic forecasters, this should be our first tax-exempt fund to reflect them."
– Nick Venditti
Laddering is one means by which we mitigate some of the forms of risk inherent in bond investing. This portfolio invests in maturities on the short end of the yield curve.
Investing a relatively even amount in each year of the ladder gives us a predictable source of organic cash flows for reinvestment in every environment, whether short rates are low, as they are now, or whether they are relatively high, as they were in 1999 and 2009.
The fund is designed to have a relatively stable net asset value (NAV), for investors with a shorter time horizon.
It’s an investment-grade portfolio, so that credit risk (and the risk of higher price fluctuations that may accompany lower-quality bonds) is kept to a moderate level. Of course, many factors contribute to price fluctuation, including market forces and a fund’s structure.
Any potential price fluctuation due to higher short-term rates should — given the short term of Low Duration Municipal Fund’s laddered structure — be mitigated quickly as bonds mature and are replaced.
The municipal bond markets typically have a large supply of floating-rate bonds whose rates reset at relatively short intervals. As the Federal Reserve gradually raises short-term rates, these bonds will reflect the higher rates almost immediately, and because they are floating-rate instruments, without a price decline.
This should be the first Thornburg municipal portfolio to capture the benefits of higher short rates.
It’s important for investors to match their investment horizon to the duration of the strategy in which they’re invested, and to diversify tax-exempt assets across the yield curve.
This is why Thornburg offers a range of strategies — from the Low Duration Municipal Fund on the short end to the Strategic Municipal Income Fund on the long end — to provide a home to match every time horizon.