Municipal Monthly

Tax day doesn't sway
muni demand

Municipal bonds posted their fifth positive month, resisting the typical tax season tendency for outflows. BlackRock's Municipals Team remains constructive.

Municipal market highlights

  • Demand for munis remained strong, bucking the typical tax season trend.
  • Investors remain yield-focused, favoring long-term and high yield funds.
  • The early tax reform framework appears modestly positive for municipals.

Market overview

Falling interest rates and a favorable supply/demand dynamic helped municipal bonds notch their fifth straight month of positive performance. Monthly issuance of $29 billion was down 18% year-over-year and 15% below the five-year average. Demand remained largely constructive and retail driven, resisting the seasonal tendency for outflows around tax day. April saw $2.4 billion enter muni bond funds, bringing year-to-date flows to $7.4 billion. Investors remain yield-focused, with flows directed primarily to long-term and high yield funds.

We view the initial tax reform framework as largely positive for municipals, given no explicit threats to the tax exemption. In fact, the elimination of deductions would likely increase retail demand for the asset class, leaving it one of few remaining tax safe-havens. Loss of the state and local tax deduction could have adverse effects on the credit quality of higher-tax states, while positive for the demand for muni bonds of high-tax states. The proposed 15% corporate tax rate poses the largest threat to municipals, as it could limit demand from banks and insurance companies.

Strategy and outlook

Munis remain important portfolio diversifiers offering a record of low volatility, high credit quality and a tax-free income advantage. While the initial tax reform proposal doesn't appear a threat, we are mindful that supply and demand could be unsteady as the market prepares for a potential June rate hike. We maintain a neutral duration stance and a preference for the A-rated space, intermediate maturities, the revenue sector, and flexible mandates with the ability to navigate uncertainty.

The S&P Municipal Bond Index has now recovered 86% of performance lost post-election, even as fund flows have only rebounded 31%.

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 ...