Municipal Market Highlights

  • While January represented a seamless continuation of 2014, February brought what we expect from 2015: greater rate volatility and uneven returns.
  • The market turn did not derive from a change in investor sentiment, but was expected after 13 months of gains, and partly fueled by increased supply.
  • Overall, February's adjustment restored some measure of value to the market, offering an opportunity for investors.

February's adjustment restored some measure of value to the market, offering opportunity for investors.”

Municipal Market Overview

February brought increased volatility across nearly all fixed income assets. The key culprits: Uneven U.S. economic data and widening central bank divergence, with international rate cuts coming at the same time the Fed lays the groundwork for normalizing U.S. rates. Munis modestly underperformed Treasuries of comparable maturity, due largely to a supply/demand dynamic that was less favorable than that enjoyed during the prior 13 months of positive muni performance.

Issuance in February was a robust $29.5 billion, well above market expectations and 22% higher than the 10-year trend. Year-to-date (YTD) issuance is 33% above the five-year average and 23% above the 10-year average. Notably, the issuance was predominantly refundings (about 60%), as new-money supply has yet to surface in a meaningful way. Demand remains robust, at nearly $3 billion for the month, and concentrated in long-term and intermediate funds. Flows into high yield munis have become more volatile, though high yield remains an attractive option in the persistent low-rate environment. While the underlying fundamentals augur well, the market is not without its headlines. Burdensome pension liabilities and need for reform continue to hamper states such as Illinois, New Jersey and Connecticut. The market is already demanding higher yields for these states’ debt. Conversely, California continues to impress and most recently was upgraded by Fitch.

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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