Municipal Monthly

Why municipal bonds
are in demand

Munis notched their best June return in more than 15 years, supported by post-Brexit risk aversion and strong demand. BlackRock’s Municipals Team remains constructive and focused on income.

Municipal market highlights

  • The municipal market bucked the typical June trend and posted its best monthly return of the year, despite elevated issuance.
  • The “Brexit” vote and expectations that the Federal Reserve (Fed) would delay hiking interest rates benefited assets offering yield and relative stability.
  • Washington stepped in to aid Puerto Rico, but the Commonwealth defaulted on $779 million in general obligation (GO) bond payments due July 1.

Market overview

Munis (and investors) carried on in June, defying the long-running seasonal trend to notch the best June return in more than 15 years. Typically one of the weakest months, this June delivered the best return of the year, even while producing the highest June supply in eight years. Uncertainty around the economic recovery, the Fed’s path toward interest rate normalization and the UK vote to leave the European Union (EU) spurred a “risk-off” sentiment that benefited quality assets. As such, demand for munis was strong enough to readily absorb the elevated supply.

MANLX
National Municipal Fund High-quality municipal holding, commitment to credit research, balancing yield and risk.

June offered a testament to munis’ defensive nature and value as a portfolio diversifier.

New issuance of $44 billion was above both the five- and 10-year averages. The increase could be attributed partly to advance refunding activity, which saw an uptick as markets pushed back their expectations for Fed rate hikes. Meanwhile, nearly $7 billion entered municipal bond funds in June, bringing the year-to-date total to $34.5 billion. The market has experienced 38 consecutive weeks of inflows, garnering $45 billion in new money. The primary target of those assets: long-duration and high-yield funds. Our approach amid the prevailing uncertainty is to remain invested, with a focus on income in a world where yields and return expectations have been adjusted lower.

Peter Hayes
Managing Director, 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 Committee.
Peter Hayes
Managing Director, 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 Committee.