• Municipal bonds notched another month of gains, as geopolitical tensions supported a continued flight to quality that benefited bonds.
  • Pension reform is proving a key differentiator in the marketplace, with states that have made progress on that front enjoying easier budgeting and better borrowing costs.
  • Investors should remain on guard as an increase in supply, coupled with pending Fed action and looming elections, could present market headwinds.

"After the market's run, profit-taking would not be surprising and a more defensive position is prudent."

Market Overview

Municipal bonds fought off early pressure to eke out a ninth positive month in September. The early-month weakness came as supply increased and demand subsided, but was offset as geopolitical concerns fueled a flight to quality that sent investors to the traditional safe-haven assets. With another month of gains, munis are now exhibiting their fourth-strongest price performance in more than two decades.

From a fundamental standpoint, pensions continue to be front and center. States addressing the issue are experiencing easier budget negotiations and smaller gaps, while those failing to enact reform are facing ratings pressure and generally higher borrowing costs. Overall, the asset class continues to benefit from favorable supply/demand, a slow economic recovery and its defensive structure in a low-rate, higher-tax environment. Issuance for September, at $22 billion, was down 17% from the five-year average and 20% from the 10-year average. Year-to-date (YTD) supply of $225 billion is 11% lower than last year. The relatively muted supply was met with demand of $2.8 billion for the month (representing $18.2 billion in inflows YTD).

Municipal Fixed Income

Once considered a secondary alternative to Treasuries, municipal bonds are gaining attention for their income, relative stability and diversification benefits. BlackRock offers a range of muni solutions to fit your needs.

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 October 6, 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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