Municipal bonds extended their winning streak and outpaced Treasuries in April, supported by favorable supply/demand. BlackRock’s Municipals Team remains constructive, despite headlines around Puerto Rico and Atlantic City.
Municipal market highlights
- Municipal bonds posted their 10th positive month and outperformed U.S. Treasuries as investors reassumed a risk-on sentiment.
- Munis have recorded 30 consecutive weeks of inflows, recovering 98% of the $65 billion in outflows experienced during the 2013 “taper tantrum.”
- The year-to-date default rate for all municipal debt outstanding is just 0.64%. This factors in Puerto Rico’s not unexpected May 1 default.
Municipal bonds notched their 10th positive month and outperformed Treasuries in April thanks largely to robust demand and manageable supply, and despite a murkier macro backdrop. Economic data disappointed, but a risk-on sentiment returned as the oil price rebounded 20% and the Federal Reserve reiterated its patience in raising rates. This caused Treasury rates to rise (and prices fall).
Muni issuance came in at $32.5 billion for April, down 21% from 2015 and 4% below the 10-year average. Demand, as measured by fund flows, was $5.3 billion for the month and $20.3 billion year-to-date (YTD). We did not see the typical tax-time outflows this April. This is likely due to lower tax bills (given lackluster equity returns in 2015) and a continued demand for high-quality income, lower relative volatility and diversification away from equity and equity-like (corporate high yield) risk.
We would view any pullback as a buying opportunity.
Crossover demand continues in a world increasingly characterized by negative interest rates. Despite unfavorable headlines in Puerto Rico, Chicago and Atlantic City, the core of the market remains healthy. Municipal Market Analytics reports the YTD default rate at 0.64%, which includes Puerto Rico’s May 1 default. Missed payments on July 1 could increase that number, but we believe that possibility has been well-telegraphed and discounted by the market.
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