Municipal bonds notched their ninth consecutive month of positive performance, thanks largely to carried income and a friendly Fed. BlackRock’s Municipals Team looks ahead.
Municipal market highlights
- Municipal bonds notched their ninth consecutive month of positive performance, thanks largely to carried income and a friendly Fed.
- Supply continues to be well absorbed given a continued investor appetite for income and relative stability in a low-rate, high-volatility world.
- Two states recently took steps to raise the hourly minimum wage to $15, a trend we are watching closely for its impact on state finances.
The municipal market bucked the seasonal trend by posting a positive March, thanks in part to an accommodative Fed, which served to push rates lower (and bond prices higher). That said, most of munis’ performance for the month came from income and not from price return.
Monthly supply, at $39.4 billion, was well telegraphed and readily absorbed by the market. While issuance was 12% below March 2015, it was still above both the five- and 10-year averages. Demand, as measured by fund flows, came in at roughly $6 billion, bringing the year-to-date (YTD) figure to an impressive $15 billion. Demand has been both robust and broad based. While the bulk of new money is entering long-duration funds, intermediate and high yield are also capturing a fair share. Strong flows have been seen in municipal exchange-traded funds as well.
One quarter into 2016, we maintain our outlook for a year not unlike 2015, when munis outpaced their taxable fixed income counterparts.
Looking ahead, all but four states will aim to finalize budgets for the July 1 start of fiscal year 2017. On-time budgets may be difficult to negotiate in places, as we saw in Illinois and Pennsylvania this year. We continue to monitor the underlying health of state revenues given the challenges presented by a low-rate, low-return environment.
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