Highlights

  • The municipal market notched another negative month, but was able to outperform more volatile Treasuries.
  • News of a potential Puerto Rico restructuring stunned the market, but had little to no price impact on the broad muni marketplace.
  • The vast majority of states managed to pass fiscal year 2016 budgets by the July 1 start date; three states remain in negotiation.

"News of a potential Puerto Rico restructuring stunned the market, but had little to no price impact on the broad muni marketplace."

Overview

True to form, June exhibited elevated volatility, higher interest rates and negative municipal performance led by securities with longer duration and lower credit quality. But this June was unusual in that the narrative (and, more specifically, the rate trajectory) changed in the closing days.

For the most part, U.S. economic data showed signs of strength throughout the month, sending rates higher (and prices lower). However, worry of a potential Greek default late in the month spurred an investor flight to quality that caused rates to reverse. Municipals were able to outperform more volatile Treasuries across the curve, but were not without their own issues as Puerto Rico’s governor announced the island’s $72 billion in debt was "not payable." Puerto Rico bonds initially sold off, but the revelation ultimately had little to no effect on the broader tax-exempt market.

Municipal bond issuance for the month was a seasonally correct $34.4 billion, down 4% year over year. Demand for the asset class remains tepid. Roughly $1 billion exited muni funds in June, but year-to-date flows are a positive $8.5 billion. Looking ahead, we expect the supply/ demand backdrop to improve as issuance wanes and retailled demand picks up during what are typically heavy reinvestment months.

BlackRock's Municipals Team offers an analysis and discusses why Puerto Rico isn't a systemic threat.

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 February 4, 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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