Municipal Monthly

Bright summer for munis?

Jun 12, 2017

Municipal bonds posted their sixth positive month, and BlackRock’s Municipals Team remains constructive heading into summer.

Municipal market highlights

  • Munis posted their sixth straight positive month amid continued solid demand.
  • Investors remain yield-focused, favoring long-term and high yield funds.
  • We like flexible strategies that can navigate rate and policy uncertainty.

Market overview

Municipals posted a positive return in May as rates fell amid continued policy uncertainty in Washington, and supported by a favorable supply/demand dynamic. New issuance of $34.2 billion was down 19% versus last year and below expectations. At the same time, demand for the asset class remained firm and broad based. New supply was easily absorbed and, in fact, oversubscribed at an average rate of 4.5x. Monthly inflows of just over $2 billion brought the year-to-date total to $9.4 billion. Flows reflected a continued investor search for yield, with long-term and high yield funds capturing the most assets.

On the credit front, state income tax collections disappointed in April as investors opted to defer the recognition of investment income in anticipation of lower tax rates. The weak collections exacerbate an already slow revenue growth trend and will likely test some states’ ability to balance their budgets before fiscal year-end (June 30 for most).

Strategy and outlook

Recent strong performance has led to richer relative valuations, but we remain constructive entering the typically favorable summer months. Our projections see demand outstripping supply during June-August. Within a neutral duration stance, we have extended our curve bias to 20+ years given waning tax policy risk. We continue to like flexible strategies with the ability to navigate uncertainty. Munis remain important portfolio diversifiers with a record of low volatility, high credit quality and a tax-free income advantage.

Credit and long duration broadly outperformed as post-election fears continued to diminish.

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 ...