Investment Insights Municipal bond market recap and outlook Third quarter 2015 William Black, CFA Senior Portfolio Manager Highlights Despite heightened volatility in the global capital markets, municipals posted strong positive returns for the third quarter of 2015. As a result of the Fed s dovish tone, municipals rallied sharply across the curve, particularly on the long end, which has reversed the increases in yields that occurred in the first half of 2015. Municipal market technicals were supported by net negative new bond issuance. State economies have improved post-financial crisis and are now exhibiting more stable fiscal conditions, business expansion, lower unemployment and increased consumer spending. During the third quarter, the municipal bond market was able to right the ship. Despite heightened volatility in the global capital markets, the asset class posted strong positive returns for the quarter. This was a change of pace from the second quarter of 2015, which was the first down quarter for the asset class since 2013. For the third quarter, investment grade (IG) municipals returned 1.65%, the strongest quarterly return since the second quarter of 2014. Quarterly performance for high yield (HY) municipals was equally as strong at 1.99%, the strongest since the third quarter of 2014. 1 This was a stark contrast from the performance in the taxable fixed income market, which has gone into negative territory for the year, 2 driven by concerns over a slowdown in global growth, falling commodity prices and uncertainty about looming interest rate increases by the US Federal Reserve. Mark Paris Senior Portfolio Manager Stephanie Larosiliere Senior Client Portfolio Manager Recent global stock market declines led investors to delay their expectation of a rate hike by the Fed in the third quarter. Federal Reserve Chair Janet Yellen cited heightened global uncertainties, such as slowing growth in China and lower inflation expectations as the two main reasons for the continued delay in increasing short-term interest rates. Although the Fed didn t hike interest rates, its behavior did contribute to elevated levels of uncertainty and volatility in the market over the quarter. Yields on municipal bonds fell across the curve during the third quarter, and as a result, most municipal bonds were able to post positive total returns. Municipal yields, which have been meaningfully higher for long-dated municipals since the end of 2014, fell in the third quarter as investors delayed their interest rate hike expectations. The shape of the yield curve flattened as yields on intermediate to long-term maturities declined more than those on the short end of the curve, leading to longer maturity bonds outperforming over the quarter. Yields on the 10-year and 30-year US Treasury bonds declined by 29 and 24 basis points (bps), respectively, and municipals followed suit with the 10-year and 30-year AAA general obligation (GO) bond yields dropping 25 and 24 bps, respectively. 3 1 Source: Barclays, as of Sept. 30, 2015. High yield municipals are represented by the Barclays High Yield Municipal Bond Index, an unmanaged index considered representative of noninvestment grade bonds. Investment grade municipals are represented by the Barclays Municipal Bond Index, an unmanaged index considered representative of the tax-exempt bond market. 2 Year-to-date performance as of Sept. 30, 2015, for Barclays U.S. Corporate Investment Grade and High Yield indexes. 3 Source: The Municipal Market Monitor (TM3) and U.S. Treasury as of Sept. 30, 2015.
Figure 1: Longer-maturity bonds outperformed shorter-maturity bonds as yields dropped across the curve Third quarter 2015 shift of AAA GO yield curve with changes in basis points Municipal curve 6/30/15 Municipal curve 9/30/15 3Q15 Muni Change (bps RHS) 3Q15 Treasury Change (bps RHS) Yield (%) bps 1 2 3 4 5 6 7 10 15 20 25 30 3.5 5 3.0 2.5 2.0 1.5 1.0 0.5 Source: Municipal Market Monitor (TM3) and U.S. Treasury, as of Sept. 30, 2015. Past performance cannot guarantee future results. 0-5 -10-15 -20-25 -30-35 Market environment: The Fed decision and the wait continues The Federal Open Market Committee (FOMC) convened mid-september to issue its highly anticipated decision on US interest rates and the wait continues. At its Sept. 17 meeting, the Fed issued a decidedly dovish statement and refrained from raising short-term interest rates. Yellen, the Federal Reserve Chair, noted heightened global uncertainties, such as slowing growth in China and lower inflation expectations as the two main reasons for the continued delay in increasing short-term interest rates. Policy decisions will be dependent on evolving global and economic developments, as the Fed looks to ensure that recent developments have not damaged the US outlook. A 2015 rate hike remains in play as Yellen acknowledged that most participants still anticipate a rate hike this year, as appropriate, but waiting until 2016 is not out of the picture. As a result of the Fed s dovish tone, municipals rallied sharply across the curve, particularly the long end, which reversed increases in yields that have occurred since year-end 2014. Figure 2: Municipals have shown strong relative performance during the quarter and year-to-date YTD 3Q 2015 Barclays High Yield Municipal Bond Index Barclays U.S. Government Index Barclays Municipal Bond Index Barclays U.S. Aggregate Bond Index Barclays U.S. Corporate Investment Grade Index Barclays U.S. Corporate High Yield Index S&P 500 Index MSCI EAFE Index Russell 2000 Index MSCI Emerging Markets Index (%) -17.90-15.48-11.92-10.23-0.10-4.86-2.45-6.44-5.29-7.73 Returns -5.28 1.99 0.03 1.71 1.79 1.65 1.77 1.23 1.13 0.83-22 -20-18 -16-14 -12-10 -8-6 -4-2 0 2 4 Source: StyleADVISOR, as of Sept. 30, 2015. Municipal bonds typically pay interest that is not subject to federal regular income tax or state and local income taxes in their state of issuance. Because of their tax benefits, municipal bonds usually offer lower pre-tax yields than similar taxable bonds. Although bonds generally present less short-term risk and volatility than stocks, the bond market is volatile and investing in bond funds involves interest rate risk; as interest rates rise, bond prices usually fall, and vice versa. Bonds also entail issuer credit risk, and the risk of default. Additionally, bonds generally involve greater inflation risk than stocks. An investment in emerging market countries carries greater risks compared to more developed economies. Smaller companies offer the potential to grow quickly, but can be more volatile than larger-company stocks, particularly over the short-term. Returns of large capitalization companies could trail the returns of smaller companies. Corporate bonds may offer a higher yield than government bonds, but are often considered riskier because they re not issued by the government. The interest of these bonds is taxable. Junk bonds involve a greater risk of default or price changes due to changes in the issuer s credit quality. Past performance cannot guarantee future results. An investment cannot be made in an index. 2
Despite the uncertainty surrounding the Fed action, municipals continued to hold up better than other asset classes (Figure 2). The impacts of global events are typically relatively muted in the municipal market given the US focus of the retail-dominated asset class. The majority of investors in the $3.7 trillion 4 tax-exempt market typically buy and hold to meet after-tax objectives rather than actively trading the securities as part of total return strategies. Technicals: 2015 is poised to be the fifth consecutive year of net negative supply Market technicals held up over the quarter as net new issuance turned negative. Furthermore, valuations reached sufficiently cheap levels, which was enough to signal value for crossover buyers. We expect this favorable technical environment to persist through the end of the year, supporting municipal performance. Issuance for the third quarter was $84 billion, a 10% year-over-year increase from third quarter of 2014. Year-to-date issuance through Sept. 30, 2015 now stands at $310 billion, a 33% increase from the same period in 2014, driven by increased refunding activity. With that said, the month of September did exhibit a precipitous decline in issuance after robust issuance months earlier in the year, likely attributed to the much-awaited FOMC meeting causing issuers to postpone new deals. Given the protracted low interest rate environment and the shape of the municipal yield curve, we expect that refunding activity will continue drive the remainder of 2015 issuance, limiting new money supply. Figure 3: Refundings continued to drive municipal issuance, albeit at a slower pace New Money Refunding Combined Municipal bond issuance ($ billion) 550 500 450 400 350 300 250 200 150 100 50 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD 2015 YTD issuance: $310 billion Source: The Bond Buyer, as of Sept. 30, 2015. Municipal funds experienced $1.6 billion of net outflows in the third quarter, primarily due to investor sentiment shifting to a reduced likelihood that the Fed would hike interest rates in the near-term. This led to an increased appetite for duration risk and $1.8 billion in redemptions from short duration municipal funds. Intermediate funds were the main beneficiaries of this shift, taking in $2.8 billion during the quarter. Figure 4: Municipal funds have experienced net inflows of over $8 billion year-to-date Monthly municipal bond fund net flows and municipal index price history Municipal bond net flows (LHS) Barclays Municipal Bond Index price (RHS) 12/09 6/10 12/10 6/11 12/11 6/12 12/12 6/13 12/13 6/14 12/14 9/15 12 120 Fund flows ($ billion) 8 4 0-4 -8-12 -16-20 Municipal bond funds experienced net outflows of $1.6 bn during 3Q 2015 Source: Morningstar and Barclays, as of Sept. 30, 2015. Past performance cannot guarantee future results. An investment cannot be made in an index. 4 SIFMA as of Oct. 5, 2015 Investment Insights: Municipal bond market recap and outlook 3 110 100 90 80 70 60 50 40 Index price ($)
Municipal credit landscape: Continued moderate but stable growth Growth in total state tax collections has fluctuated significantly in the last two years. Total state tax collections were rather weak in the first half of calendar year 2014 but have resumed growth since then. State tax collections exhibited moderate growth in the second half of 2014 and the first quarter of 2015. 5 Overall improvement in most state economies has led to more stable fiscal conditions, business expansion, lower unemployment and increased consumer spending. Through the first three quarters of fiscal 2015, states collected $638 billion in total tax revenues, a gain of 5.3% from $605 billion collected in the same period of fiscal 2014. Similarly, personal income tax and corporate income tax both showed growth at 6.7% and 6.5%, respectively. Growth was also reported in sales tax and motor fuel sales tax collections at 6.3% and 2.4%, respectively. All regions had growth in overall tax collections in the first three quarters of fiscal 2015, with the Rocky Mountain region having the greatest growth at 8.3%, while the Southeast region had the weakest growth at 4.0%. In general, enacted budgets for fiscal 2016 show widespread modest increases in spending, although a majority made targeted cuts to specific programs. Most states are directing a large portion of their fiscal 2016 funding to education, especially K-12 and early education. Much of the additional spending in governors budget proposals is directed toward core services, such as education, healthcare, corrections and transportation. Education remains a top priority for the majority of states, as many governors viewed increasing educational opportunities as a way to achieve their long-term goals of creating jobs and growing the economy. Healthcare spending is also targeted to increase in most states. Healthcare contained fewer wide-range proposals than the prior year, but spending still increased overall. Another area of emphasis was the need to increase transportation and infrastructure spending, with several governors releasing comprehensive plans calling for additional revenue and major new investments. Overall, the state revenue outlook for fiscal 2016 appears positive for most states. With the economy now growing steadily and the disruptions related to the fiscal cliff largely in the past, it is likely that states will see continued growth in fiscal 2016. However, one big unknown relates to the stock market, which has fallen sharply in recent weeks and could bode ill for estimated and final payments of personal income tax later this fiscal year. Another big unknown is related to the large drop in oil prices, which has created headaches for the oil-rich states. While all oil-rich states face fiscal challenges, the drop in oil prices had a particularly huge impact on Alaska, where severance taxes made up over three-quarters of total taxes. Looking at municipals as part of your core Most recently, municipals have been advantageous to investors as they have been largely unaffected by the slowdown in global growth, falling commodity prices and lower inflation expectations. In an environment where investors are uncertain about the timing and extent of interest rate increases, creating a diversified portfolio that has appropriate levels of risk and that has the potential to meet investment goals, even when markets don t move as expected, is critical. Diversification can potentially help mitigate interest rate movements and other market risks. Bonds, in particular, can help to provide diversification and income in an overall portfolio whether to offset equity risk or generate income. Because municipal bonds pay interest that is normally exempt from federal income taxes, and in some instances state income taxes, an investment in the tax-exempt market can also be used to potentially reduce tax liability in a broad portfolio. Historically, investment grade and high yield municipal bonds have exhibited low correlations to other asset classes (Figure 7, correlation table), suggesting that an investment in municipal bonds can be an effective portfolio diversifier. The universe of municipal bonds is expansive, spanning across the 50 states, as well as in certain US territories, and across a wide range of sectors from the government-related to private projects, potentially providing varying degrees of diversification. Given the wide array of available issuers, maturities, yields and sectors in the municipal market, when added to a portfolio of corporate and government bonds they can increase overall portfolio diversification. The Barclays Municipal Bond and Barclays High Yield Municipal Bond indexes have exhibited correlations of 31% and -8%, respectively, to the Barclays US Government Bond Index (Figure 7, correlation table). This correlation illustrates that investment grade and high yield municipal bonds have not moved to the same degree as government bonds over a 10-year period. Because different asset classes involve different types of risk, a diversified portfolio can help reduce overall portfolio volatility. A balance of equities and municipal bonds has historically lowered the overall investment risk 6 and produced attractive after-tax returns compared to an all-equity portfolio. Over the five-year period from 2010-2015, a portfolio of municipal bonds and equities provided higher or comparable after-tax returns with similar or less risk than equivalent Treasury or credit blends. 5 Latest available data 6 Measured by standard deviation 4
Figure 5: A municipal/equity blend provides less risk than an all-equity portfolio and higher after-tax returns over five years Municipal/equity blend Treasury/equity blend Credit/equity blend Annualized after-tax return (%) 16 14 12 10 8 6 4 60%/40% 40%/60% 20%/80% 80%/20% 20%/80% 40%/60% 20%/80% 60%/40% 40%/60% 60%/40% 100% Muni 80%/20% 80%/20% 100% Credit 4 5 6 7 8 9 10 Annualized standard deviation (%) 100% Equity 100% Treasury 11 12 13 Source: Barclays and StyleADVISOR, as of Sept. 30, 2015. Asset Classes are represented by index returns. Index data sources: Barclays Municipal Long Bond Index (municipals), Barclays U.S. Treasury Long Index (Treasuries), Barclays U.S. Long Credit Index (credit), and S&P 500 Index (equities). Municipal returns are noted on an after-tax basis using a tax equivalent yield of 36.8%, comprised of the average five-year Federal Tax Rate on investment income for single taxpayers in the highest tax bracket. Past performance is not a guarantee of future results. An investment cannot be made directly into an index. Putting it all together Attractive yields may make municipal bonds a compelling standalone opportunity or an addition to a broader investment portfolio. Their tax-exempt status certainly enhances their relative appeal, but even on an absolute basis municipal bonds have the potential to offer attractive opportunities for income and capital appreciation. Three reasons to consider municipal bonds 1. Tax advantage: New laws, as well as tax provisions that expired at the end of 2013, have led to larger tax bills for many high-income earners. Some of the significant changes to tax law include: a top marginal rate of 39.6%, up from 35%; a 20% tax on long-term capital gains and dividends, up from 15%; and a new 3.8% tax on investment income, from which municipal income is exempt. We believe that these higher tax rates increase the incentive for taxpayers to seek tax-exempt income via municipal bonds. Municipals have the potential to offer a broad range of investment options that are exempt from federal income tax and can be exempt from state and local income taxes. However, income may be subject to the alternative minimum tax (AMT). Figure 6: Municipal bonds can potentially provide attractive taxable equivalent yields Stated yield Tax benefit US Treasury (10-year) 2.06% Corporate IG bonds 3.42% Municipal IG bonds 2.18% 1.79% Total yield 3.85% Corporate HY bonds 8.04% Municipal HY bonds 6.81% 5.22% Total yield 12.03% (%) 0 2 4 6 8 10 12 14 Source: Barclays and Bloomberg L.P., as of Sept. 30, 2015. High yield corporate bonds are represented by the Barclays U.S. Corporate High Yield Index; high yield municipal bonds by the Barclays High Yield Municipal Bond Index; investment grade municipal bonds by the Barclays Municipal Bond Index; and investment grade corporate bonds by the Barclays U.S. Corporate Investment Grade Index. The tax-adjusted calculation uses a tax rate of 43.4%, which is the top federal tax bracket of 39.6% + the net investment income tax of 3.8%.Past performance is not a guarantee of future results. An investment cannot be made directly in an index. Investment Insights: Municipal bond market recap and outlook 5
2. Diversification potential: We believe diversification can potentially increase opportunities for growth and reduce overall portfolio risk. Because municipal bonds historically have had very low correlation to other asset classes, including equities and Treasuries, they can be effective portfolio diversifiers. Over the last 10-year period ending Sept. 30, 2015, the Barclays Municipal Bond and Barclays High Yield Municipal Bond indexes have exhibited low correlations of 11% and 27%, respectively, to the S&P 500 Index. This is in contrast to the Barclays U.S. Corporate High Yield and Barclays U.S. Corporate Investment Grade indexes, which have exhibited correlations of 73% and 35%, respectively, to the S&P 500 Index over the same time period. Figure 7: Municipals have offered equity investors higher diversification benefits than corporates 10-year asset class correlations: September 2005 September 2015 1 2 3 4 5 6 7 8 9 10 1 Barclays Municipal Index 1.00 0.64 0.53 0.57 0.36 0.31 0.11 0.15 0.14 0.06 2 Barclays High Yield Municipal Index 0.64 1.00 0.19 0.35 0.48-0.08 0.27 0.31 0.27 0.19 3 Barclays U.S. Aggregate Bond Index 0.53 0.19 1.00 0.81 0.24 0.87 0.05 0.17 0.15-0.02 4 Barclays U.S. Corporate IG Index 0.57 0.35 0.81 1.00 0.62 0.46 0.35 0.47 0.47 0.27 5 Barclays U.S. Corporate High Yield Index 0.36 0.48 0.24 0.62 1.00-0.23 0.73 0.74 0.76 0.71 6 Barclays U.S. Government Index 0.31-0.08 0.87 0.46-0.23 1.00-0.28-0.18-0.21-0.32 7 S&P 500 Index 0.11 0.27 0.05 0.35 0.73-0.28 1.00 0.78 0.89 0.92 8 MSCI EM Index 0.15 0.31 0.17 0.47 0.74-0.18 0.78 1.00 0.89 0.73 9 MSCI EAFE Index 0.14 0.27 0.15 0.47 0.76-0.21 0.89 0.89 1.00 0.80 10 Russell 2000 Index 0.06 0.19-0.02 0.27 0.71-0.32 0.92 0.73 0.80 1.00 Source: Morningstar, as of Sept. 30, 2015. This correlation illustrates that investment grade and high yield municipal bonds have not moved to the same degree as their corporate counterparts when the equity market rises or falls. We believe that this low correlation can potentially enhance a portfolio s diversification benefits. 3. Relatively lower default risk: Contrary to popular belief, the vast majority of municipal bond issuers have remained creditworthy and municipal default rates have remained relatively low, especially when compared with US corporate bonds. As shown in the chart below, when the credit structure decreases, the odds of a default rise. However, the percentages are much higher for investment grade corporates compared with municipals. Since 1986, there has never been an AAA-rated municipal bond default. Similarly, in the same time frame, only 0.03% has defaulted with an AA-rating. By contrast, AA-rated corporate issuances have had a 0.82% default rate since 1981. Figure 8: Municipal default rates have remained relatively low, especially compared with US corporates 10-year average cumulative default rate Rating categories (1986-2014) (1981-2014) Municipal bonds % Corporate bonds % AAA 0.00 0.74 AA 0.03 0.82 A 0.09 All rated municipal 1.51 BBB 0.42 bonds have a lower 4.06 BB 4.28 10-year cumulative 13.74 default rate than B 11.85 25.91 Aaa-rated CCC-C 39.02 50.73 corporate bonds. All S&P Investment Grade 0.14 2.24 All S&P Non-Investment Grade 8.71 21.97 All S&P Rated Securities 0.24 9.15 Source: Standard and Poor s, as of May 2015. Past default rates are no assurance of future default rates. The data presented is the most recent data available from the various bond rating agencies. 2015 data may increase cumulative default rates from both municipal and corporate bonds. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. For more information on rating methodologies, please visit the following NRSRO websites: www.standardandpoors.com and select Understanding Ratings under Rating Resources on the homepage. 6
Furthermore, in a July 2015 report, 7 S&P confirmed this lower default risk, stating that tracking the data from 2011 reveals a definitive trend: historically, municipal bonds have a lower propensity to default. Looking at the most recent time periods in the chart below, the S&P Municipal Bond High Yield Index experienced a 0.04% increase in defaults during the 6-month period ending June 2015. In comparison, over the same time period, US speculative-grade corporate bonds experienced a 0.58% increase in defaults. According to S&P research, the 2014 12-month trailing default rate for municipal bonds was 0.17%, and apart from US Treasuries, it would be difficult to find another category in the US fixed income market that had a lower default rate. Figure 9: Municipals have a historically lower default rate than other bond asset classes Year New Monetary Defaults S&P Municipal Bond Index S&P Municipal Bond High Yield Index No. of Deals Entering Default* Total No. of Deals in Index Default % Total No. of Deals in Index US Speculative Grade Corporate Bonds Default % Default % 2011 46 20,307 0.227 3,032 1.520 1.98 2012 30 20,802 0.144 3,005 1.000 2.60 2013 23 21,523 0.107 2,848 0.807 2.10 2014 35 20,568 0.170 2,769 1.264 1.52 2015 YTD 37 22,470 0.165 2,835 1.305 2.10 Source: S&P Dow Jones Indices LLC. Standard & Poor s Ratings Services Global Fixed Income Research, as of June 30, 2015. *Deals in index defaulting on principal and/or interest for the first time. Outlook Broad capital markets have experienced their fair share of volatility over the third quarter of 2015. Treasury yields have fluctuated, with solid US economic growth and the prospect of the Federal Reserve increasing short-term rates putting upside pressure on rates, while global macro concerns like the situations in Greece and China have been pushing yields lower. Despite these concerns, our outlook for the municipal bond market remains positive from both a technical and fundamental perspective. Fundamentally, the municipal bond market has the potential to see credit appreciation, as both tax collections and the housing market remain firm. Revenue bonds should continue to improve as well, as the economy s GDP continues to grow in the 1.5% to 2.5% range. This should allow for further spread tightening and price appreciation in high yield and lower-rated bonds. From a technical perspective, we expect low supply and strong demand to remain in place for the remainder of the year. Municipal bonds are also attractive compared to their taxable alternatives on an absolute basis. Long-term high grade municipals are trading at over 100% of 30-year Treasuries, and high yield municipals are about 100% of taxable corporate bonds. Although we continue to monitor the credit concerns in Puerto Rico and Chicago, it is our belief that these risks are idiosyncratic and will not cause contagion into other parts of the tax-exempt marketplace. It is our belief that the remainder of 2015 will be less volatile than the first nine months of the year. In terms of performance, we expect the fourth quarter of 2015 to be driven by income, with modest opportunities for price appreciation. Invesco Municipal Bond team The Invesco Municipal Bond team s management philosophy is based on the belief that creating long-term value through comprehensive, forward-looking research is the key to providing clients with highly diversified portfolios that aim to maximize risk-adjusted returns. Proprietary credit research and risk management are the foundations of our investment process, supported by a deep and experienced team of investment professionals with expertise that spans the entire municipal investment universe. We maintain an integrated, team-based investment process that combines the strength of our fundamental credit research staff with the market knowledge and investment experience of our portfolio managers. Our position among the top 10 municipal managers allows us the ability to access preferred market opportunities and gain valuable market insight. 8 Our team has established relationships with more than 120 national and regional tax-exempt debt dealers. These established relationships, as well as our size, allow us to achieve superior execution in daily transactions. Our ability to aggregate trades across multiple funds enables us to obtain lower institutional pricing, which can contribute to fund performance. 7 S&P Dow Jones Indices, Fixed Income Update, Year-to-date as of June 30, 2015 bond default rates. 8 Source: Strategic Insight Simfund/MF Desktop, based on assets under management as of Sept. 30, 2015. Investment Insights: Municipal bond market recap and outlook 7
About risk Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer s credit rating. Junk bonds involve a greater risk of default or price changes due to changes in the issuer s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods. Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer s ability to make payments of principal and/or interest. Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest. Income may be subject to state and local taxes and to the alternative minimum tax (AMT). Puerto Rico s economic problems increase the risk of investing in Puerto Rican municipal obligations, including the risk of potential issuer default, heightens the risk that the prices of Puerto Rican municipal obligations, and may experience greater volatility. Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com/fundprospectus. Past performance cannot guarantee future results. Diversification does not guarantee a profit or eliminate the risk of loss. The opinions expressed are those of the portfolio managers, are based on current market conditions and are subject to change without notice. There is no guarantee the outlooks mentioned will come to pass. These opinions may differ from those of other Invesco investment professionals. The Barclays U.S. Corporate High Yield Index is an unmanaged index considered representative of fixed-rate, non-investment grade debt. High yield municipals are represented by the Barclays High Yield Municipal Bond Index is an unmanaged index considered representative of non-investment grade bonds. The S&P/LSTA Leveraged Loan Index is a weekly total return index that tracks the current outstanding balance and spread over Libor for fully funded term loans. Investment grade municipals are represented by the Barclays Municipal Bond Index is an unmanaged index considered representative of the tax-exempt bond market. Investment grade corporates are represented by the Barclays U.S. Corporate Investment Grade Index is an unmanaged index considered representative of publicly issued, fixed-rate, nonconvertible, investment grade debt securities. The Barclays U.S. Aggregate Bond Index in an unmanaged index considered representative of the US investment grade, fixed-rate bond market. S&P 500 Index is an unmanaged index considered representative of the US stock market. The MSCI EAFE Index is an unmanaged index considered representative of stocks of Europe, Australasia and the Far East. The index is computed using the net return, which withholds applicable taxes for non-resident investors. The MSCI Emerging Markets Index is an unmanaged index considered representative of stocks of developing countries. The index is computed using the net return, which withholds applicable taxes for non-resident investors. The Russell 2000 Index is an unmanaged index considered representative of small-cap stocks. The Russell 2000 Index is a trademark/service mark of the Frank Russell Co. Russell is a trademark of the Frank Russell Co. The Barclays U.S. Government Bond Index is an index that measures the performance of all public US government obligations with remaining maturities of one year or more. The Barclays Municipal Long Bond Index is a sub-index (consisting of bonds with maturities of at least 22 years) of the Barclays Municipal Bonds Index, a broad-based, total return index composed of investment-grade, fixed-rate municipal bonds selected from issues larger than $50 million issued since January 1991. The Barclays U.S. Treasury Long Index includes securities in the long maturity range of the U.S. Treasury Index. Securities must have a maturity of 10 years or more. The U.S. Treasury Index represents public obligations of the U.S. Treasury with a remaining maturity of one year or more. The Barclays U.S. Long Credit Index measures the performance of the long-term sector of the US investment bond market, which includes investment grade corporate debt and sovereign, supranational, local authority and non-us agency bonds that are dollar-denominated and have a remaining maturity of greater than or equal to 10 years. US Treasuries are represented by the Barclays U.S. Treasury Index is an unmanaged index of public obligations of the US Treasury with remaining maturities of one year or more. Past performance is no guarantee of future results. An investment cannot be made directly in an index. Fed Funds Rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Correlation indicates the degree to which two investments have historically moved in the same direction and magnitude. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Standard deviation measures a fund s range of total returns and identifies the spread of a fund s short-term fluctuations. A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed income security. 2015 Morningstar, Inc. All rights reserved. The information contained herein is proprietary to Morningstar and/or its content providers. It may not be copied or distributed and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. invesco.com/us MUNIMKT-INSI-1 11/15 Invesco Distributors, Inc. US13159