Municipal market insight

Muni bonds start the year strong

Feb 13, 2019


  • Seasonal trends and falling rates drove strong returns on munis in January.
  • Modest issuance during a peak in reinvestment resulted in net negative supply.
  • We expect coupon income to make up the majority of total return in 2019.

Market overview

Municipal bonds posted strong performance in January, thanks to favorable seasonal trends and interest rates continuing to fall as investors anticipated slower global growth and a pause in the Federal Reserve’s rate hikes, while contending with a prolonged U.S. government shut down and geopolitical uncertainty, most notably in relation to China and the Brexit deal.

The S&P Municipal Bond Index climbed 0.73% in January, with particularly strong returns on short- and intermediate-term bonds, the higher (AAA-) and lower (BBB-) ends of the quality spectrum, insured bonds, issues in high-yielding states, and the leasing, transportation and education sectors.

As we had anticipated in our 2019 Outlook, seasonal trends held true to form with a modest level of gross issuance outstripped by reinvestment activity, creating a very favorable net negative supply environment (i.e., more bonds are called, refunded or mature than new bonds issued).

Demand for the asset class was firm. Muni bond mutual fund flows rebounded from their late-2018 outflows with four consecutive weeks of inflows in January. Likewise, bid-wanted activity, a burden on the market through most of last year, has moderated of late – a trend we expect to continue as the bulk of the heavy selling among banks prompted by upcoming changes to tax and accounting rules should be nearly played out at this point.


We expect supply-and-demand dynamics to remain favorable and interest rates to be relatively stable for the near term. After several years of the muni market bucking its seasonal trends, we foresee a more traditional year ahead, with coupon income likely making up a majority of total returns.


We favor a neutral-to-slightly long duration stance with respect to municipal bond positioning, expressed though a barbell yield curve strategy with concentrations in maturities of 0-2 and 20 years+. We prefer revenue bonds, lower-rated investment grade credits, and issues in high tax states.

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Investment ideas for 2019

1. Stay invested. Sitting in cash means missing out on coupon payments. A buy-and-hold approach to municipal investing provides better potential for capturing total return, which we expect will be made up largely of coupon return versus price return throughout this year.

2. Position tactically. Seasonal patterns should be more true to form this year. Increase duration ahead of negative net supply periods and reduce duration when supply is poised to outpace demand.

3. Diversify opportunistically. Consider high tax states including New Jersey, New York, Massachusetts, Maryland and California, where the SALT curtailment will have the largest effect on individual tax payers.

4. Don't dismiss high yield. We wouldn't recommend an overweight currently given uncertainty around Puerto Rico issuance, but we believe some exposure can be beneficial for income generation within a well-rounded portfolio.

Peter Hayes
Head of Municipal Bonds
Peter Hayes, Managing Director, is Head of the Municipal Group within BlackRock's Global Fixed Income group and a member of the Global Fixed Income Executive ...
James Schwartz, CFA
Head Credit Research Analyst, Municipal Credit Research
Jim Schwartz, CFA, Managing Director, is Head of Municipal Credit Research within BlackRock's Global Fixed Income group. He is a member of BlackRock's Municipal ...
Sean Carney
Head of Municipal Strategy, BlackRock Investment Strategy Team
Sean Carney, Managing Director and Head of Municipal Strategy and Primary Markets team within BlackRock's Global Fixed Income Group. He is also a member of the ...
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Strategic Municipal Opportunities Fund
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California Municipal Opportunities Fund
New York Municipal Opportunities Fund
New Jersey Municipal Fund
Pennsylvania Municipal Fund

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