THE WEEK IN MUNILAND - AllianceBernstein

Weekly Market Commentary

The Week in Muniland

November 21, 2022

Investors Gobble Up Bonds

+ Muni bonds were flying off the shelf this week, as if buyers believed that there were going to be no more bonds

left to buy. Demand from ETFs and separately managed accounts led the buying wave. For the week: two-, 10and 30-year AAA-rated muni yields fell 26, 23 and 29 basis points (b.p.), respectively. US Treasury (UST) yield changes were somewhat mixed, with two-year maturity bonds up 18 b.p. while 10- and 30-year yields fell 3 and 13 b.p., respectively.

? Why it matters: The muni investor needed some good news and they got it in spades this month, with yields

falling as much as 53 b.p. The Bloomberg Municipal Index was up 1.90% for the week and is now up 3.66% for the month. Weekly municipal mutual fund flows also turned positive for the first time in 14 weeks, with $605 million of net inflows. Flows remain negative for the year at $112.4 billion. To give a sense of the demand for bonds...the $600 million Nashville International Airport deal received $7.7 billion in orders, while the $126 million Santa Clara, California, water bond has $1.3 billion in orders. The $294 million Pennsylvania Turnpike deal was also 17?20 times oversubscribed, depending on maturity. We are cautiously optimistic that the worst year in the muni market is finally in the rearview mirror, but wouldn't be surprised if the market gives back some of these recent gains.

+ Not to be Johnny Raincloud, but investors should not believe that, based on the recent rally, we have been given

the "all clear" sign.

? Why it matters: Barring a sizable UST rate move, the muni market should be fairly quiet next week given the Thanksgiving holiday. However, December is setting up to be a "sloppy" month for various reasons. The three weeks beginning November 28 will bring up to $24 billion in new issue bonds to the market, with approximately $10 billion coming the week of November 28. If valuation don't change much, munis will come into that week looking somewhat expensive to fair value relative to USTs. Managers and investors who were asleep at the wheel this year may also make a last push to tax-loss harvest. On top of that, we will get an employment report (December 2), an inflation report (December 13) and the Federal Open Market Committee meeting (December 13?14). The expectation is that the Fed will increase its benchmark interest rate by 50 b.p. to a range of 4.25%? 4.50%. The point is, be patient given the uncertain environment. FOMO (the fear of missing out) can be a powerful incentive for investors to invest sooner than they had planned. Could the market run further if the next inflation print comes in lower than expected? Yes. But what if it doesn't? Does anyone know for certain? No. We do suggest participating given stored value, but be careful not to invest all at once.

+ What can an investor expect if investing in the muni bond market today?

? Why it matters: Today the yield on a 6.25-year-duration portfolio with an A+ average credit quality is 4.5%. With muni yields this high, even if the yield on the 10-year UST rose to 4.85% over the next 12 months, investors would still break even. If after-tax spreads (Display 1) and credit spreads (Display 2) return to longterm averages, the total return could be in excess of 9% over the next 12 months. To be clear, this is a bull case for municipals, but investors should understand that the risk in the muni market is no longer asymmetric to the downside, but rather likely to the upside. Display 4 also provides total return expectations under various UST scenarios.

Positioning for Today's Market

+ Inflation Protection: Given the current level of inflation breakevens, eliminate tactical inflation protection.

+ Interest-Rate Risk: As yields have increased, target neutral duration versus the appropriate benchmark. + Credit Risk: Own credit, as spreads have widened and credit fundamentals remain strong (Display 2).

+ Taxable Bonds: Munis are cheap relative to US Treasuries (Display 1).

The Week in Muniland: Investors Gobble Up Bonds

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Displays of the Week: November 21, 2022

Display 1: 10-Yr. AAA Muni/US Treasury After-Tax Spread (Basis Points)

1.2

1.1

1.0

Municipals meaningfully outperformed US Treasuries

0.9

to start the month, causing after-tax spreads to

0.8

tighten. Spreads remain above the longer-term

0.7

average of 52 b.p.

0.6

0.5

As of November 18, 2022 Source: Municipal Market Data and AB

Display 2: BBB Municipal Credit Spreads (Percent) 3.0

2.5

2.0

1.5

1.0

0.5 2016 2017 2018 2019 2020 2021 2022

Through November 18, 2022 Source: Bloomberg and AB

Display 3: Market-Implied Fed Funds Rate (Percent)

5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0

Dec Feb Mar May Jun Jul Sep Nov Dec Jan 22 23 23 23 23 23 23 23 23 24

As of November 11, 2022 Source: Bloomberg and AB

BBB credit spreads widened due to mutual fund outflows, even though credit fundamentals remained strong.

The market now expects the terminal rate to peak at 4.90% in May 2023, then fall to 4.27% by January 2024.

Display 4: Expected 12-Month Municipal Returns Scenario Analysis 10-Year US Treasury Yield (Percent)

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5

2012

2014

2016

2018

2020

2022

10-Year Treasury, 4.50%

10-Year Treasury, 3.83%

10-Year Treasury, 3.25%

2.25% 4.55% 6.50%

Past performance and historical analysis do not guarantee future results. Display reflects expected returns of a 6.25-year-duration intermediate municipal portfolio under three scenarios: 10-year US Treasury yields rise to 4.50%, remain the same or decline to 3.25% over the next 12 months. As of November 18, 2022 Source: Bloomberg and AB

The Week in Muniland: Investors Gobble Up Bonds

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A Word About Risk

Market Risk: The market values of the Portfolio's holdings rise and fall from day to day, so investments may lose value. Interest-Rate Risk: Fixedincome securities may lose value if interest rates rise or fall--long-term securities tend to rise and fall more than short-term securities. The values of mortgage-related and asset-backed securities are particularly sensitive to changes in interest rates due to prepayment risk. Credit Risk: A bond's credit rating reflects the issuer's ability to make timely payments of interest or principal--the lower the rating, the higher the risk of default. If the issuer's financial strength deteriorates, the issuer's rating may be lowered, and the bond's value may decline. Inflation Risk: Prices for goods and services tend to rise over time, which may erode the purchasing power of investments. Foreign (Non-US) Risk: Investing in non-US securities may be more volatile because of the political, regulatory, market and economic uncertainties associated with such securities. These risks are magnified in securities of emerging or developing markets. Currency Risk: If a non-US security's trading currency weakens versus the US dollar, its value may be negatively affected when translated back into US-dollar terms. Diversification Risk: Portfolios that hold a smaller number of securities may be more volatile than more diversified portfolios, since the gains or losses from each security will have a greater impact on the Portfolio's overall value. Derivatives Risk: Investments in derivative instruments such as options, futures, forwards or swaps can be riskier than traditional investments and may be more volatile, especially in a down market. Leverage Risk: Trying to enhance investment returns by borrowing money or using other leverage tools magnifies both gains and losses, resulting in greater volatility. Municipal Market Risk: Debt securities issued by state or local governments may be subject to special political, legal, economic and market factors that can have a significant effect on the Portfolio's yield or value. An investor cannot invest directly in an index. Investment and Insurance Products: Not FDIC insured l Not a bank deposit l Not insured by any federal government agency l No bank guarantee l May lose value

The [A/B] logo is a registered service mark of AllianceBernstein and AllianceBernstein? is a registered service mark used by permission of the owner, AllianceBernstein L.P.

? 2022 AllianceBernstein L.P. 18-0090

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