• Municipal yields followed their U.S. Treasury counterparts lower, producing another month of positive price performance.
  • The key performance catalysts were geopolitical tensions, which perpetuated an investor flight to safety, and continued favorable supply/demand.
  • Munis continue to be sought after for their relative stability and tax-exempt income, but some profit taking could occur given the extraordinary run.

Market Overview

The municipal market notched another positive month, benefiting from a continued imbalance in supply and demand as well as ongoing geopolitical conflicts that have served to maintain a flight-to-safety bid in fixed income securities. Investor appetite for the asset class, particularly during times of uncertainty, has been robust and issuance has been unable to satisfy the demand.

Specifically, new issuance came in at $24.6 billion for the month, bringing year-to-date (YTD) supply to $203.4 billion (down 12% vs. last year and 9% vs. the five-year average). Demand, as measured by fund flows, was $2.9 billion for August and $15.3 billion YTD. All told, the net-negative supply pattern is growing ever larger, highlighting the market’s strong technicals. In addition, muni creditworthiness remains on solid footing.

Notably, the market has never started a year with eight consecutive months of positive performance, a run we attribute to falling rates on the back of uneven U.S. economic data and geopolitical tensions that are driving fixed income assets, particularly munis, higher. The trend lower in rates has left fixed income markets far from cheap. However, municipals continue to be sought after for their defensive structure, tax-exempt income and overall stability in today’s low-rate environment.

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.

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.

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 August 9, 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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