Municipal Market Highlights

  • Although trailing Treasuries, municipal bonds posted a solid month as interest rates fell and prices for high-quality fixed income assets rose.
  • Increased refunding activity brought an uptick in supply, a trend worth watching given the important role supply/demand plays in muni market performance.
  • We continue to advocate a barbell approach, holding very short maturities for liquidity and longer maturities for income enhancement and lower volatility.

Longer-dated munis continue to offer the most compelling income versus Treasuries both before and after tax.

Municipal Market Overview

The strong momentum of 2014 carried into January, helping to set a solid month for municipals. Performance of high-quality fixed income assets continues to be driven by falling interest rates, global economic uncertainty, easy monetary policies (and comparatively low rates) overseas, weak inflation expectations and an investor need for income. Evidence of the last point came in investors' continued preference for longer-duration and lower-rated munis offering relatively higher yields.

Issuance was a robust $27 billion, 39% higher than last January and exceeding the five- and 10-year averages, which are closer to $22 billion. Refunding activity drove much of the uptick in issuance, as low rates and a flattening curve prompted issuers to refinance their debt. While a month does not make a trend, we are watching the pattern in advanced refundings closely. Should it continue, it could have the potential to disrupt the favorable supply/demand dynamic that has been an important performance tailwind through some four years.

On the month, demand for munis (and the attractive tax-exempt income they offer) held firm. Flows into municipal bond mutual funds totaled $4.6 billion, representing one of the strongest Januarys on record.

What's in the Stars for Munis?

Point of View with Peter Hayes
The municipal bond market posted a return above 9% in 2014, as the stars aligned in spectacular fashion for the asset class. Peter Hayes, Head of the BlackRock Municipal Bonds Group, offers his outlook for 2015.

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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