Municipal Market Highlights

  • The municipal market continued its winning streak, posting a positive return for the 11th straight month as it aspires to a perfect year.
  • Issuance was strong in November, but demand was more than enough to absorb the supply and prevent market losses.
  • The longest-maturity munis are now outyielding Treasuries before tax, offering attractive relative value and compelling income.

Municipal Market Update Pullquote

Trends bode well for a fully positive 2014, as December is traditionally a friendly month for munis.

Municipal Market Overview

November muni performance (at 0.17%) may not look remarkable on the surface, but given the headwinds, it was an impressive feat—allowing the market to maintain its perfectly positive year. Specifically, the fourth quarter is often marked by greater volatility and an increase in municipal bond issuance. This year has been no different, except that the demand for high-quality fixed income assets has been voracious, and that served to offset the larger supply and mute volatility.

Muni issuance for the month came in at $28.3 billion, bringing year-to-date (YTD) supply to $295 billion. Meanwhile, muni bond mutual funds attracted $3 billion in new assets in November, bringing YTD inflows to $23.8 billion. Fund flows have been positive for 19 consecutive weeks. November performance also benefited from an investor flight to safety, which continued to push yields lower (and prices higher). The rate drop was more pronounced in the Treasury market. That has driven muni-to-Treasury ratios above 100% for 30-year maturities, making municipal bonds an attractive income option for investors and drawing the attention of crossover buyers.

Fundamentals remain solid as well, though the recent drop in oil prices has us cautious on states heavily reliant on energy production. Still, defaults are on pace to be at their lowest in three years, and with the midterm elections resulting in a unified Congress, any chance of tax reform appears far off. The market is more focused on the high bond measure approval rate, a potential sign that the aversion to debt is fading.

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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