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Highlights

  • In a market characterized by investor complacency and positive momentum, munis were able to post moderate gains.
  • Municipal bonds took directional cues from Treasuries, but the market did look to credit conditions in separating individual winners from losers.
  • Our strategy now is focused on building resilient portfolios—meaning moving up in quality and enhancing liquidity for trading flexibility.

Market Overview

After a tentative start, municipal bonds emerged from July in positive territory for yet another month. Leading the way were lower-rated credits and those with maturities of 12 years and longer, as investors continue to gravitate toward strategies that have “worked” for them year-to-date (YTD ). Directionally, munis continue to take cues from U.S. Treasury rates, but we are seeing dispersion based on credit conditions, which is creating winners and losers. For example, those states struggling with pension reform (e.g., Illinois, Pennsylvania and New Jersey) recently experienced ratings pressure, while states replenishing rainy-day funds (e.g., California) enjoyed greater demand and improved borrowing costs.

The technical backdrop remained favorable in that supply once again underwhelmed investor demand. July issuance was $26 billion—down 6% vs. the 5-year average, 12% vs. the 10-year average and 16% vs. last year. A 25% drop-off from the prior month was meaningful, as it exceeded the typical June-to-July decline of 16%. Meanwhile, demand remained consistently positive, aside from one well telegraphed outflow that we would attribute to Puerto Rico-related concerns. Inflows of $1.9 billion in July brought the 2014 total to $12.4 billion.

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.

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 August 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.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.

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