MainStay High Yield Municipal Bond Fund - Investments Group

December 2012

Portfolio Manager Commentary

December 2012 3Q 2013

MainStay High Yield Municipal Bond Fund

Quarterly highlights

The municipal market decline that began in June 2013 prevailed during the first two months of the quarter amidst continued heavy outflows from municipal bond funds and ETF's, the Detroit bankruptcy filing, and ongoing negative news regarding the fiscal health of Puerto Rico.

Overall, the Barclays Municipal Bond Index returned -0.19%. Meanwhile, the Barclays High Yield Municipals Bond Index posted a -2.96% return.

Issuance in the third quarter saw slightly lower numbers than historical values with supply reaching $65.3 billion.1 Revenue and refunding bonds experienced the greatest supply, as measured by market value.

MainStay High Yield Municipal Bond Fund trailed the Barclays Municipal Index during the quarter. The Fund's overweight to longer maturities versus the benchmark was the main detractor from performance. The yield curve steepened during the quarter which produced significant price declines for longer dated securities.

The Fund did benefit from its zero exposure to Puerto Rican credits which produced the worst performance in the market.

Entering the final quarter of 2013 with municipal yields at extremely attractive levels when compared to other fixed income asset classes, we believe that the portfolio is positioned to benefit from potential outperformance as municipal spreads compress toward historical norms.

Market summary

The third quarter of 2013 saw the Barclays Municipal Bond Index generate positive returns across the bulk of the yield curve. However, there was some back-end weakness, as evidenced by the decline in the 20-Year and Long Bond subindices (down to -0.89% and -2.14%, respectively), while the short-end of the curve posted higher returns. Overall, the Barclays Municipal Bond Index returned -0.19%. Meanwhile, the Barclays High Yield Municipals Bond Index posted a -2.96% return.

Issuance in the third quarter saw slightly lower numbers than historical values with supply reaching $65.3 billion.1 Revenue and refunding bonds experienced the greatest supply, as measured by market value. The best-performing investment grade revenue bond sectors included water & sewer (0.14%), education (0.11%), and resource recovery (-0.08%) sectors, while the best-performing high yield revenue bond sectors included electric (0.89%), housing (0.55%), and airlines (-0.23%).1 The highest total return municipal state/territory indices were: Montana (1.31%), Connecticut (0.76%), and Iowa (0.75%).

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Puerto Rico, Virgin Islands, and Illinois declined the most during the quarter. Puerto Rico paper was the most actively traded towards the end of the quarter, with spreads widening meaningfully during September.1

The Fed's recent announcement (which delayed asset purchase tapering) should continue to mitigate the rise in rates over the near term. The end of the quarter saw a rebound that was led by the investment-grade sector (notably high-grade GOs), high yield funds, and favorable tobacco judgments. Recovery plans from Harrisburg, PA and Stockton, CA, as well as the return of Michigan issuers' ability to access capital, and the Obama Administration's provision of $320 million in assistance to Detroit also contributed to the rebound.2 These events helped reduce the losses of the last three months and brought optimism that municipals may perform better in the fourth quarter.

Overall, despite some difficulties in the market, municipal bonds have performed relatively well. We believe that demand for municipal bonds will continue to grow into the next quarter. As we have discussed in previous reviews, we expect that investors seeking to protect their investment income will continue to allocate investments to the municipal market.

Fund performance

MainStay High Yield Municipal Bond Fund ended the month of September with approximately $920 million in assets. The Fund's Class A shares underperformed the Barclays Municipal Index, as well as the secondary benchmark (blended 60% Barclays High Yield Municipal Index and 40% Barclays Municipal Index).

The municipal market decline that began in June 2013 prevailed during the first two months of the quarter amidst continued heavy outflows from municipal bond funds and ETF's, the Detroit bankruptcy filing, and ongoing negative news regarding the fiscal health of Puerto Rico. The market seemed to regain some balance during September and municipal high yield actually saw positive flows during the final two weeks of the month. The better tone helped produce positive returns during September for both the Fund and the overall market.

The Fund's overweight to longer maturities versus the benchmark was the main detractor from performance. The yield curve steepened during the quarter which produced significant price declines for longer dated securities. The Fund did benefit from its zero exposure to Puerto Rican credits which produced the worst performance in the market. As the market moved to lower prices, we were extremely active in the portfolio executing tax losses to offset prior realized gains, as well as improving book yields. Entering the final quarter of 2013 with municipal yields at extremely attractive levels when compared to other fixed income asset classes, we believe that the portfolio is positioned to benefit from potential outperformance as municipal spreads compress toward historical norms.

This material contains the opinions of the MacKay Municipal ManagersTM Team of MacKay Shields LLC but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC. ?2013, MacKay Shields LLC.

About risk

A portion of the Fund's income may be subject to state and local taxes or the alternative minimum tax. High-yield securities (sometimes called "junk bonds") are sometimes considered speculative because they present a greater risk of loss than higher quality debt securities, may be less liquid, and can also be subject to greater price volatility. High-yield municipal bonds may be subject to increased liquidity risk as compared to other high-yield debt securities. The Fund may invest in derivatives, which may increase the volatility of the Fund's net asset value and may result in a loss to the Fund. Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers, and the possibility of future tax and legislative changes which could affect the market for and value of municipal securities.

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Such uncertainties could cause increased volatility in the municipal securities market and could negatively impact the Fund's net asset value and/or the distributions paid by the Fund. Securities purchased by the Fund that are liquid at the time of purchase may subsequently become illiquid due to events relating to the issuer of the securities, market events, economic conditions or investor perceptions. Funds that invest in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer's ability to make such payments may cause the price of that bond to decline.

All holdings and sector weightings are aggregated as of September 30, 2013, and are not indicative of future holdings or weightings. This information has been provided for informational purposes only and may change daily. Past performance is no guarantee of future results.

Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax- exempt bond market. The index is composed of approximately 60% revenue bonds and 40% state government obligations.

Barclays Municipal High Yield Bond Index is an unmanaged index made up of bonds that are non-investment grade, unrated, or rated below Ba1 by Moody's Investors Service with a remaining maturity of at least one year.

BAA Municipal Index, AAA Municipal Index, and Long Bond Municipal Sub Index are subsets of the Barclays Municipal Bond Index. An investment cannot be made directly into an index.

Treasury securities, when held to maturity, are backed by the full faith and credit of the United States government as to timely payment of principal and interest. Interest income on these securities is exempt from state and local taxes.

Credit Ratings: AAA Credit ratings apply to the underlying debt securities and are rated by an independent rating agency such as Standard & Poor's (S&P), Moody's, and/or Fitch. S&P rates borrowers on a scale from AAA to D. AAA through BBB represent investment grade, while BB through D represent noninvestment grade. Moody's rates borrowers on a scale from Aaa through C. Aaa through Baa3 represent investment grade, while Ba1 through C represent non-investment grade. Fitch rates borrowers on a scale from AAA through D. AAA through BBB represent investment grade, while BB through D represent noninvestment grade.

1. Source: Barclays Credit Research, October 2, 2013. 2. Municipal Market Advisors, September 2013.

For more information about MainStay Funds, call 800-MAINSTAY (624-6782) for a prospectus or summary prospectus. Investors are asked to consider the investment objectives, risks, and charges and expenses carefully before investing. The prospectus or summary prospectus contains this and other information about the investment company. Please read the prospectus or summary prospectus carefully before investing.



MainStay Investments? is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. The MainStay Funds? are managed by New York Life Investment Management LLC, an indirect subsidiary of New York Life Insurance Company, and distributed through NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey 07054, and a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member of FINRA/SIPC.

?2013 NYLIFE Distributors LLC. All rights reserved.

NYLIM-31536

MSMHY02b-10/13

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