The Allspring California Tax-Free Fund experienced an underperformance relative to its benchmark, the Bloomberg California Municipal Bond Index, during the third quarter of 2025. This result was primarily influenced by less favorable credit choices and specific security selections, even though the fund's positioning within various sectors and its management of bond durations provided some positive contributions. The period also saw a notable action from the Federal Open Market Committee, which adjusted its key interest rate, adding another layer of complexity to the market environment. Despite these challenges, the fund maintains an optimistic outlook on municipal bonds, believing that current interest rates offer an attractive entry point for investors and that income generation will be the main impetus for this asset class in the foreseeable future. The fund's strategic allocation continues to favor revenue bonds over general obligation bonds.
During the three-month period concluding on September 30, 2025, the Allspring California Tax-Free Fund did not meet the performance of its designated benchmark. While the fund's strategic choices regarding sector allocation and the management of duration and curve positioning positively influenced its returns, these gains were insufficient to offset the negative impacts stemming from credit decisions and individual security selections. The Federal Open Market Committee's decision to lower its benchmark interest rate to a range of 4.00–4.25% in September played a significant role in shaping the broader market landscape. This adjustment led to a decrease in yields across the curve, which ultimately benefited the fund due to its longer duration relative to the benchmark.
The fund's management continues to strategically favor revenue bonds, which are backed by specific revenue streams, over general obligation (GO) bonds, typically secured by the full faith and credit of the issuing municipality. This decision reflects a careful consideration of prevailing market conditions and a belief in the relative strength and stability of revenue-backed instruments. This deliberate underweighting of GO bonds and overweighting of revenue bonds is a core component of the fund's strategy to navigate the municipal bond market effectively.
Despite the recent underperformance, the outlook for municipal bonds remains strong, according to the fund's assessment. The current absolute rates are viewed as presenting a compelling entry point for investors looking to participate in this market. Furthermore, the expectation is that income generation will be the primary driver of returns for the municipal bond asset class in the near term. This perspective underscores a confidence in the fundamental value and income-producing potential of municipal securities, even as the market adapts to evolving economic and policy environments.
In summary, while the Allspring California Tax-Free Fund lagged its benchmark in the third quarter of 2025 due to specific credit and security choices, its duration strategy proved beneficial as interest rates fell. The fund continues to hold a positive view on municipal bonds, anticipating that their income potential will attract investors, and maintains a strategic preference for revenue bonds over general obligation bonds.
