Municipal Market Highlights

  • After posting gains in December, the municipal bond market was able to claim a perfectly positive year.
  • Issuance was very strong in December, as was demand, both defying typical patterns and pointing to continued strong momentum heading into 2015.
  • Given the precipitous fall in oil prices, we are monitoring the economies of those states that rely heavily on oil production.

With 2014 momentum well intact, we see little reason for big changes as the calendar turns the page.

Municipal Market Overview

The municipal market went 12 for 12 in 2014, posting a positive December to round out a perfect year. Performance for the month was buoyed by falling rates (and rising bond prices) as the Fed maintained its accommodative stance and the global economy remained fragile. The market’s performance defied even the most optimistic projections for the year.

December, which tends to be a quiet month as supply winds down and activity slows toward year-end, was anything but typical in 2014. Issuance of $37.8 billion was quite robust and outpaced both the five- and 10-year averages by nearly 20%. The vast majority was refundings as issuers took advantage of low rates. Demand also bucked the seasonal trends, remaining strong thanks in part to healthy market momentum. Municipal mutual funds saw inflows in 50 out of 52 weeks, bringing the annual total to $27 billion. Notably, while supply in 2014 was nearly identical to 2013, it was heavily weighted toward year-end. The question is whether that trend will continue into 2015.

Consistent with recent patterns, longer-duration securities and higher-risk sectors led performance in December. Oil prices were the topic du jour, and while lower energy prices benefit consumers, we are monitoring those states whose economies rely heavily on revenues from oil production (e.g., Alaska, Wyoming, the Dakotas and, to a lesser extent, Texas and California).

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.

A portion of the income may be taxable.

Index returns are for illustrative purposes only.  Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 8, 2014, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader.

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