• Municipal bonds outperformed Treasuries and corporates in December and emerged as the best-performing fixed income asset class of 2015.
  • Puerto Rico defaulted on a portion of its debt Jan. 1, though the market cheered payment on general obligation (GO) bonds.
  • Our outlook for 2016 is constructive given munis’ high-quality nature, unique tax advantage and attractive income in a world where long-term rates are likely to remain low.

"We have a constructive outlook for municipals in 2016."

Market overview

The municipal market outperformed both Treasuries and corporate bonds in December, propelled once again by favorable supply/demand dynamics. The yield curve flattened significantly, with the short end rising as the Fed lifted its target short-term interest rate for the first time since 2006 and the long end holding steady as global growth disappointed and oil prices approached a six-year low, muting inflation expectations.

Issuance was unseasonably low for the fourth straight month, at $22.2 billion, down 41% year over year and 29% below the 10-year average. On an annual basis, supply was up vs. 2014 and the historical averages, though it should be noted that 55% of new issues were refundings. Meanwhile, demand continued strong, with $5.9 billion in inflows recorded in December. This capped 13 weeks of positive flows and brought the 2015 total to $16.3 billion. We expect this technical tailwind to hold in January and February, which should allow the traditional retail buyer to absorb supply and carry the market with less reliance on non-traditional and crossover (taxable) buyers.

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Where Should I Be In Munis?

Municipal Credit Highlights

Knowing what to own (and avoid) is critical in today’s muni market. BlackRock municipal credit experts dig into recent topics, issues and trends in a new quarterly report.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.

A portion of the income may be taxable.

Index returns are for illustrative purposes only.  Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of Jan. 8, 2016, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader.

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