Municipal market insight

Muni bonds defy seasonal trends

Apr 11, 2018

Municipal market highlights

  • March brought more volatility, but coupon income drove a positive monthly return.
  • Tax reform disruptions at year end drove a negative first-quarter return. 
  • Subdued primary issuance and strong retail demand continue to support the market.

Market overview

Muni bonds continued to exhibit heightened volatility in March, yet the S&P Municipal Bond Index finished the month 0.42% higher. Interest rates rallied lower late in the month (bond prices rise when rates fall) as the Federal Reserve’s estimate for three rate hikes in 2018 remained unchanged at the close of their March meeting, and the announcement of U.S. tariffs on Chinese imports renewed fears of a trade war.

The municipal market has defied long-standing seasonal trends thus far in 2018. The positive return in March is a notable departure from what has historically been the worst-performing month on average, while January and February, which are typically positive months, saw negative returns in 2018. Overall, the first-quarter return was negative (-0.92%), an anomaly for the muni market, not seen in a decade. However, this return is not reflective of any structural weakening in demand; rather it is driven mainly by the sharp selloff in January after issuance and performance had been pulled forward in December ahead of tax reform.


While interest rates are likely to continue to be the driver of absolute performance, we expect the favorable technical backdrop to support the outperformance of muni bonds versus Treasuries. Muni issuance is expected to remain muted into the summer and retail demand is expected to remain firm overall, although aggregate fund flows could be poised to decelerate in the coming weeks as investors sell their muni bond holdings to meet tax obligations. However, the recent underperformance of munis has reset relative valuations to more attractive levels, particularly in the long-end of the curve, which is likely to draw increased interest from crossover buyers, providing support to the market.

Strategy and positioning

Given our expectation for a continued favorable technical backdrop, we have shifted from a defensive to a more neutral stance on duration (interest rate sensitivity), while maintaining our barbell yield curve strategy with exposure concentrated in maturities of 0 to 2 years and 20 years+.

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 ...

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 Fund, 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.