Municipal market insight

Muni market weakness presents
buying opportunities

Dec 11, 2017

Municipal market highlights

  • Muni bonds sold off in November as anticipated tax reform spurred heavy supply.
  • Long term and high yield sectors continue to benefit from strong demand for yield.
  • Any near-term weakness into year end is likely to support a strong start to 2018.

Market overview

Municipal bond prices broadly declined in November as tax reform uncertainty spurred expectations for an influx of new issues before year end. The proposed elimination of the tax exemption for advanced refunding bonds and private activity bonds is compelling issuers to “pull forward” these types of deals that had been slated for 2018, essentially rushing them to market ahead of the expected enactment date of January 1. The anticipated pull forward began to materialize late in the month, resulting in issuance at $41.6 billion, which is 37% higher than November’s five-year average. Demand for the asset class remained firm through most of the month, and despite some deceleration toward month end, net flows into municipal mutual funds remained positive. Investors’ need for yield continued to drive outperformance in long term and high yield sectors.

We view the current market weakness as short term. With issuance being pulled forward as 2017 comes to a close, we can expect dampened issuance in early 2018. This, combined with the recent underperformance resetting relative value measures to more attractive levels, should support a strong supply-and-demand dynamic in the new year. We expect an additional boost from the seasonal “January effect” – when a surge in reinvestment activity tends to push muni bond prices higher. Given a more positive outlook around the corner, we see near-term weakness as a buying opportunity.

Strategy and outlook

Going into year end, we anticipate taking advantage of attractively priced opportunities in the primary market as issuers flood the market with deals pulled forward due to tax reform concerns. Any degree of near-term weakness is likely to tee up the market for a strong start to 2018. We shifted to a longer duration stance in late November, favoring maturities of 0-2 and 20+ years, and we continue to prefer lower-rated investment grade credits.

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 ...