AllianceBernstein National Municipal Income Fund (ABMNX): Seizing Tax-Exempt Yield in a Rising Rate World

In an era of persistent inflation and shifting Federal Reserve policies, investors seeking stable, tax-advantaged income must look beyond traditional fixed-income markets. The AllianceBernstein National Municipal Income Fund (ABMNX) emerges as a compelling option, leveraging its April 2025 portfolio adjustments to capitalize on rising rate environments while maintaining a fortress-like credit profile. For high-income taxpayers, this fund's strategic rebalancing—focused on duration management, mortgage-backed securities, and emerging market opportunities—positions it as a cornerstone of risk-adjusted returns in 2025 and beyond.

Duration Discipline in a Rate-Sensitive World

ABMNX's April portfolio reflects a sharp pivot to mitigate interest rate risk. The fund holds a 90% relative underweight in duration versus its benchmark, signaling a tactical retreat from long-dated bonds as the Fed's rate-hike cycle continues. This shift is critical: with the 10-year Treasury yield at 4.3% and inflation showing resilience, prolonged exposure to long-duration debt could amplify losses. Instead, the fund's "slightly bulleted" yield curve strategy—overweighting the middle of the curve—aims to capture steepening dynamics. By favoring 3-7 year Treasuries (now 10.95% of assets) and reducing long-term exposure, ABMNX balances income generation with protection against rate volatility.

Mortgage-Backed Securities: A Hidden Gem in Rising Rates

The fund's 150% overweight in mortgage-backed securities (MBS) is its most aggressive call. MBS typically underperform when rates rise, but ABMNX's thesis hinges on two factors: (1) slower refinancing activity as Treasury yields climb, stabilizing MBS prices, and (2) superior yields versus Treasuries. The iShares MBS ETF now accounts for 40.5% of assets, up from 35.6%, a bold bet that higher rates will limit prepayments and lock in spreads. This allocation also aligns with the fund's tax-exempt mandate: MBS offer federally tax-free income for high earners, a rare advantage in today's yield-starved landscape.

Emerging Markets Debt: Currency Plays for Extra Yield

ABMNX's 10% allocation to emerging market local debt (via the WisdomTree Local Debt Fund) replaces prior exposure to riskier senior loans. This move capitalizes on two trends: (1) a weakening U.S. dollar, which boosts returns on foreign currency-denominated bonds, and (2) higher yields in EM local debt versus U.S. corporate bonds. While emerging markets carry geopolitical risks, the fund's focus on investment-grade credits (e.g., Mexico, Poland) and diversification mitigates tail risks.

Credit Quality: A Fortress Built for Turbulence

Though direct Q1 2025 credit metrics for ABMNX are unavailable, sister fund AFB's portfolio offers a template. As of April, 87.9% of its assets sat in investment-grade credits (AAA/Aaa to BBB/Baa), with minimal exposure to junk bonds (7.94% of holdings). This conservative tilt aligns with ABMNX's municipal focus, where defaults are rare. Even in a recession, high-quality muni bonds—backed by tax revenues and essential services—are less vulnerable than corporate debt.

Tax Efficiency: The Secret Sauce for High Earners

ABMNX's true edge lies in its tax-free status, a lifeline for investors in the 32%+ federal bracket. With the fund's current 30-day SEC yield of 4.1%, the after-tax advantage over taxable bonds (e.g., corporate notes yielding ~5.2%) is stark. For a taxpayer in the 35% bracket, ABMNX's effective yield rivals taxable bonds yielding 6.3%—a gap that widens as rates rise.

Risks and the Case for Long-Term Commitment

No strategy is without risk. ABMNX's MBS overweight faces headwinds if housing demand collapses, while EM debt could falter in a dollar-strengthening scenario. However, these exposures are hedged by the fund's diversified sector mix (e.g., 10.95% in short-term Treasuries) and disciplined credit selection. With average maturity of 6.5 years and a duration of 4.2, ABMNX's downside risk is tempered compared to pure-play bond funds.

Final Verdict: A Rare Blend of Safety and Yield

In an era of fiscal uncertainty and Fed hawkishness, ABMNX offers a rare combination: tax-free income, inflation-resistant duration positioning, and credit quality that rivals top-rated corporates. Its April rebalancing—shifting toward MBS, EM debt, and intermediate Treasuries—positions it to thrive as rates rise, while its fortress-like credit metrics insulate it from defaults. For investors in high tax brackets seeking to weather volatility, this fund is a no-brainer.

Act now: With yields near multiyear highs and the Fed's pause button pressed, ABMNX presents a compelling entry point. Pair it with a long-term horizon to capture the full benefit of tax-free compounding—and sleep soundly as rates climb.