Municipal market insight

Muni bonds forge ahead into tax season

Mar 8, 2019


  • Muni bonds posted a fourth consecutive month of strong returns in February.
  • Reinvestment outpaced modest issuance, resulting in net negative supply.
  • We expect demand to remain strong as tax payers feel the effects of tax reform.

Market overview

Municipal bonds forged ahead with a fourth consecutive month of strong performance in February amid favorable supply-and-demand dynamics and range-bound interest rates. The S&P Municipal Bond Index gained 0.53% over the month, bringing the year-to-date return to 1.26%. Particularly strong returns came from the long end of the yield curve, lower-rated investment grade credits, Puerto Rico bonds, issues in higher-yielding states (CT, NJ, IL, PA), and the utility and healthcare sectors.

Gross issuance was modest at $24.9 billion. Although this level is 53% higher than the tax reform-driven dearth experienced in 2018, it is still 2% below the historical five-year average. As we projected in our 2019 Outlook, this modest level of issuance has continued to be outpaced by reinvestment income, creating a favorable net negative supply environment (i.e., more bonds are called, refunded or mature than new bonds issued).

Demand for the asset class was sensational in February, with four consecutive weeks of net inflows. From a fund flow perspective, 2019 is off to the best start of any year on record (based on data published by the Investment Company Institute). Demand has been broad-based across sectors, although long-term municipal funds drew in particularly strong flows.


Although continued strong performance has resulted in fairly stretched relative valuations, especially in the front and intermediate parts of the yield curve, we remain constructive on the asset class. We anticipate that issuance will remain manageable and retail demand may strengthen further as investors are likely to place a higher value on the tax advantages of municipal bonds after realizing the disappointing impact of reform during tax season.


We favor a long duration stance with respect to municipal bond positioning, employing a barbell yield curve strategy with concentrations in maturities of 0-2 and 20 years+. Cash has become increasingly attractive given higher short-term rates, and longer-dated bonds offer the more compelling valuations along the yield curve.

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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.

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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