• Municipal bonds posted a solid month, outpacing their U.S. Treasury counterparts and reinforcing our outlook for a positive year.
  • A favorable balance of supply and demand drove the strong performance, though a year-end pick-up in new issuance is anticipated.
  • Illinois and Puerto Rico continue to make headlines, though Chicago bonds rallied with the passing of the city’s budget and progress on the pension front.

"We believe the attractive relative income and high-quality nature of the tax-exempt asset class should continue to guide sentiment."

Market Overview

Volatility returned to more normal levels in October as the market refocused on the data and rate hike expectations settled on December or early 2016. Munis outperformed U.S. Treasuries, aided by continued inflows and below-average bond issuance. New supply of $32 billion was 11% lower than last October and 10% below the 10-year average. Demand picked up, evidenced by a significant $2.8 billion in inflows after five consecutive months of outflows.

We would not be surprised to see an increase in issuance toward year-end, as the Treasury recently reopened the SLGS (state and local government series securities) window after sales of the securities had been suspended in March to manage the national debt limit. SLGS are often used by state and local governments for their advance refunding escrows. That said, we see the supply uptick as short-lived and believe the attractive relative income and high-quality nature of the tax-exempt asset class should continue to guide sentiment.

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Where Should I Be In Munis?

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.

A portion of the income may be taxable.

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