4 reasons munis look hot this summer

Municipal bonds have historically delivered strong returns during the summer months. Additional tailwinds make our outlook for this summer even brighter.

After a flood of debt issuance in the spring due to state and local governments wrapping up their fiscal year (most ending on June 30th), the primary market tends to be relatively quiet in the months that follow. In short, muni bond supply tends to be low in the summer.

Meanwhile, the spring push of prior years has resulted in a high volume of maturities, calls and coupons coming due around the same time. Investors seeking to reinvest those dollars during a lull in issuance typically creates a favorable imbalance in the muni bond market where demand outpaces supply.

The seasonal trend of net negative supply has driven strong muni bond performance summer after summer. Over the past five years, the S&P Municipal Bond Index gained 1.65% on average for the months of June through August, which is significant considering full-year returns during that period averaged 3.86%.

Muni bonds have posted strong returns in the summer months

S&P Municipal Bond Index total returns (%)

Munis chart

Source: Bloomberg.

We believe the summer of 2021 could be a particularly strong season for muni bond performance given four reasons:

1. An exacerbated seasonal trend

We anticipate tax-exempt muni bond issuance to be lower in 2021 versus prior years due to tax law changes that have increased the proportion of municipal debt issued with taxable income. According to our calculations, during the months of June through August, net negative supply will be roughly -$46 billion. Compared to the five-year average of -$32 billion, the 2021 forecast suggests stronger-than-usual seasonal dynamics.

2. The reopening of the U.S. economy

Many sectors of the economy are benefiting from the return to business as usual and municipals are no exception. State revenues have returned to pre-pandemic levels with the help of household stimulus checks supporting consumer spending. Tax collections have even exceeded budget projections in a number of state and local governments over the past year. We anticipate states will continue to benefit from the rollout of vaccines, resilience of sales and income taxes, strength in the U.S. housing and equity markets, and very low borrowing rates.

3. Improving credit fundamentals  

State and local governments broadly have recovered from the financial strains caused by the pandemic. Fiscal aid during the height of the crisis helped close budget gaps and credit fundamentals have continued to improve from there. The American Rescue Plan is providing an additional $350 billion of aid over the course of the next year, further strengthening the bottom line of municipal debt issuers.

4. The focus on Infrastructure

While many details of the Biden Administration’s infrastructure plan are yet to be fleshed out, the latest bipartisan proposal excluded tax hikes as the primary source of funding. Thus, we anticipate a heavy reliance on the municipal market to finance the building of new infrastructure, which may entail federal government incentives to states and locals. Nevertheless, discussions are ongoing and there is ample room to bring a tax hike back to the table via other avenues. The possibility of higher taxes implies the benefit of tax-exempt income could be worth even more tomorrow than today.

We expect a significant portion of the muni market’s 2021 full-year return to be generated during the months of June through August. In our view, this season presents a unique opportunity for investors who seek high-quality sources of tax-advantaged income with the additional benefits of low market volatility and equity diversification.

Peter Hayes
Head of Municipal Bonds
Peter Hayes, Managing Director, is Chief Investment Officer and Head of the Municipal Bond Group within the Portfolio Management Group (PMG) as well as Global Head of ...
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Sean Carney
Sean Carney
Head of Municipal Strategy, BlackRock Investment Strategy Team
Sean Carney, Managing Director and Head of Municipal Strategy and Primary Markets Group within BlackRock's Municipal Fixed Income business in BlackRock's Portfolio ...
James Schwartz, CFA
James Schwartz, CFA
Head Credit Research Analyst, Municipal Credit Research
Jim Schwartz, CFA, Managing Director, is Head of Municipal Credit Research with Municipal Fixed Income business in BlackRock's Portfolio Management Group. He is a member ...

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Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance.

To obtain more information on the funds, including standardized average annual total returns as of the most recent calendar quarter and month end, please visit National Municipal Fund, Strategic Municipal Opportunities Fund and High Yield Municipal Fund.