Biggest Bond-Fund Ratings Changes

Investors appeared to rotate out of the long end of the Treasury bond market and reallocate into the short end of the Municipal market in May, a move that reduces the duration of bond investments.

Put another way, it means that investors were seeking protection from interest rate volatility.

The month of May brought the now usual turmoil and uncertainty in the credit markets and investor concerns focused on comments by the Federal Reserve that it was monitoring the rise in inflation. This suggested that rate cuts were on hold and maybe the Fed would consider raising rates if inflation was deemed to be getting out of control. However a rate rise seems unlikely given the recent news on how weak the banking sector and the general economy are.

Nonetheless, inflation is a component used in the setting of the general level of market interest rates and its rise is now feeding into the mortgage market and other debt markets. This caused a selloff in the pricy Treasuries markets as investors reallocated funds to the less pricy municipal bond market. As mentioned above some investors reduced their sensitivity to interest rate changes by investing in short-duration municipals.

TSC ratings models upgraded the following municipal bond funds and the pick of the list are the top four which all carry a rating of B or above. These funds include the DWS Short-Term Muni Bond Inst(MGSMX Quote), the New Hampshire Municipal Fund(NHMUX Quote) and two funds from the PIMCO focused on short-duration municipals, i.e. those municipals that have one to two years to maturity.

Fund Name	Ticker	Current Rating	Previous Rating	Category
DWS Short-Term Muni Bond Inst	MGSMX	A-	C+	Municipal - National
PIMCO Short Duration Muni Inc D	PSDDX	B	C-	Municipal - National
New Hampshire Municipal Fund	NHMUX	B+	C	Municipal - Single State
PIMCO Short Duration Muni Inc Adm	PSDMX	B+	C	Municipal - National
Eaton Vance National Muni I	EIHMX	C	E	Municipal - National
Eaton Vance AMT-Free Muni Bd I	EVMBX	C	E+	Municipal - National
Eaton Vance NC Muni	ECNCX	C	E+	Municipal - Single State
PIMCO Municipal Bond Admin	PMNAX	C	D-	Municipal - National
Eaton Vance KS Muni C	ECKSX	C-	E	Municipal - Single State
Eaton Vance MI Muni C	ECMIX	C-	E	Municipal - Single State
Eaton Vance AL Muni B	EVALX	C-	E+	Municipal - Single State
Eaton Vance AZ Muni B	EVAZX	C-	E+	Municipal - Single State
Eaton Vance AMT-Free Muni Bd B	EBMBX	D	E-	Municipal - National
Eaton Vance OR Muni C	ECORX	D	E-	Municipal - Single State
Eaton Vance PA Muni B	EVPAX	D+	E	Municipal - Single State

On the U.S. government side, the majority of the selling action took place on the long end of the yield curve. Accordingly, these funds were downgraded by our model.

Fund Name	Ticker	Current Rating	Previous Rating	Category
American Century Tgt Mat.-2020 Adv	ACTEX	E	C	US Treasury
American Century Tgt Mat.-2025 Inv	BTTRX	E	C	US Treasury
Rydex Ser-Govt Lg Bd 1.2x Strgy Inv	RYGBX	E-	C-	US Government - Long
Wasatch Hoisington US Treasury	WHOSX	E-	C-	US Treasury
Federated USG Bond Fund	FEDBX	E+	C	US Government - Long
PIMCO Long Term US Govt Admin	PLGBX	E	C-	US Government - Long
Vanguard Long-Term Bond Index Fd	VBLTX	E	C-	General Bd - Long
Dreyfus UST Long Term	DRGBX	D-	C	US Treasury
PIMCO Long Term US Govt Inst	PGOVX	E+	C-	US Government - Long
Rydex Ser-Govt Lg Bd 1.2x Strgy Adv	RYADX	E-	D	US Government - Long