• The Federal Reserve's decision not to raise interest rates in September sparked a rally in fixed income assets, particularly municipal bonds.
  • Market performance was further aided by light monthly issuance, despite uneven demand in an environment of continued investor uncertainty.
  • Treasury yields fell (and prices rose) by an even greater degree in September, which kept munis attractive on an after-tax basis with ratios above 100% for maturities of 10 years and longer.

"Munis look attractive. With ratios above 100%, the market is not pricing in the benefit of tax exemption."

Market Overview

September featured heightened volatility, fueled by the Fed's decision not to raise interest rates and a dovish statement that factored in international concerns like never before, stoking worry over global economic conditions. Fixed income assets rallied, with particular strength in municipal bonds, led by longer duration and high yield credits.

Munis' positive performance was further aided by the lightest September issuance in over a decade. New supply for the month came in at $18.3 billion, which was 23% below the five-year average and 31% lower than the 10-year average. Meanwhile, the demand trend seemed to point to a looming sense of investor uncertainty, with negative flows turning decidedly positive after the Fed’s decision, only to resume outflows in the final week of the month. In all, September was marked by $1.25 billion in outflows, though flows remain positive year-to-date at $5.6 billion. Given the prevailing global backdrop, we continue to expect a low-for-longer interest rate environment in which high-quality fixed income assets will be a preferred choice among investors.

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Where Should I Be In Munis?

Municipal Credit Highlights

Knowing what to own (and avoid) is critical in today’s muni market. BlackRock municipal credit experts dig into recent topics, issues and trends in a new quarterly report.

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 Oct. 7, 2015, 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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