Municipal Monthly

Municipal bonds thrive on
seasonal strength

Aug 7, 2017

BlackRock’s Municipals Team shares timely insight on market trends.

Municipal market highlights

  • After a slight dip in June, munis rebounded in July on seasonal strength.
  • Investors continue to seek yield in long-term and high yield funds.
  • Munis continue to offer high-quality income potential with low volatility.

Market overview

Seasonal trends drove a rebound in muni bonds last month, with the additional support of interest rates remaining largely range-bound. July has historically proven to be a strong performance month for municipal bonds given lower issuance after the spring supply push and heightened demand from investors seeking to reinvest proceeds from maturing and called bonds. New issuance continued to underwhelm expectations, posting the lowest July total since 2001 at just $23.4 billion, down 19% year-over-year and 20% below July’s 10-year average. This muted supply was met with July’s historically large reinvestment flows, resulting in net negative supply of -$27 billion, which ultimately drove performance. Outside of a small rate-driven outflow to start the month, demand for the asset class remained consistent and yield-driven, with long-term and high yield funds continuing to garner the bulk of assets.

Strategy and outlook

We anticipate seasonal strength in munis to continue through August, however, supply is likely to pick up in the fall months. Although valuations remain elevated, we continue to view municipal bonds as a key component of a well-diversified portfolio, given their ability to provide high-quality income, low volatility, and negative correlation to equities and high yield corporate bonds. From a strategy perspective, we maintain our neutral duration bias and a preference for the A-rated space, the intermediate and long end of the curve, and revenue bonds.

August tends to be a strong performance month for munis based on historical averages.

Peter Hayes
Head of Municipal Bonds Group
Peter Hayes, Managing Director, is Head of the Municipal Bonds Group within BlackRock Fundamental Fixed Income and a member of the Fixed Income Executive ...