Municipal market insight

Muni bonds still going strong

Sep 10, 2018

Municipal market highlights

  • Muni bonds delivered a fourth consecutive month of positive returns in August.
  • Seasonal market patterns provided the tailwind of net negative supply.
  • Our outlook is cautious as the fall months typically are less favorable for munis.

Market overview

In a fourth consecutive month of positive performance, the S&P Municipal Bond Index gained 0.19% in August, bringing its year-to-date return to 0.42%. Interest rates migrated lower over the month as investors focused more on the ongoing macro uncertainties – geopolitical concerns, trade negotiations and Mueller’s Trump election investigation – versus the continuation of strong U.S. economic growth. (Bond prices typically move inversely to interest rates.)

Demand for the asset class has remained firm. Notably, alongside the recent divestment from equities, investor flows into municipal bond mutual funds have been yield-driven and concentrated in long-term and high yield funds. The stronger performing areas of the market in August included high yield, led by Puerto Rico and tobacco, bonds with terms of 15 years+, the hospital and education sectors, and issues of high-tax states such as New Jersey, California, Illinois and Massachusetts.

Gross issuance levels are gradually returning to normal after a dearth experienced earlier in the year. Still, the muni market continued to benefit from the tailwind of net negative supply that typically occurs in the summer months. For the month of August, gross issuance of $32.4 billion paired against the seasonal swell of capital reinvestment resulted in net negative supply of -$7.2 billion.


Looking to the fall months ahead, we maintain a cautious outlook on the asset class as the market is poised to transition back to net positive supply, which has historically pressured performance. Additionally, we see potential for an increase in volatility should uncertainty heighten around upcoming Fed moves, the midterm elections and geopolitical developments.

Strategy and positioning

We maintain a neutral duration bias expressed via barbell yield curve positioning. Concentrations in the 0-2 year and 20 year+ segments can provide added liquidity while taking advantage of increasingly attractive relative valuations in the long end of the curve. We continue to prefer lower-rated investment grade credits, revenue bonds, and the transportation, healthcare and tobacco sectors. The active use of hedges can help dampen volatility and protect against rising interest rates.

Peter Hayes
Head of Municipal Bonds
Peter Hayes, Managing Director, is Head of the Municipal Group within BlackRock's Global Fixed Income group and a member of the Global Fixed Income Executive ...
James Schwartz, CFA
Head Credit Research Analyst, Municipal Credit Research
Jim Schwartz, CFA, Managing Director, is Head of Municipal Credit Research within BlackRock's Global Fixed Income group. He is a member of BlackRock's Municipal ...
Sean Carney
Municipal Strategist, BlackRock Investment Strategy Team
Sean Carney, Director, is the Head of Municipal Strategy within BlackRock's Global Fixed Income Group, one of the largest managers of U.S. municipal bond ...
To obtain more information on the funds including the Morningstar time period ratings, please visit:
Strategic Municipal Opportunities Fund
National Municipal Fund
High Yield Municipal Bond Fund
California Municipal Opportunities Fund8
New York Municipal Opportunities Fund
New Jersey Municipal Fund
Pennsylvania Municipal Opportunities Fund

The Morningstar RatingTM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to for most recent month-end performance.