Municipal market insight

Remaining patient on munis

Mar 7, 2018

Municipal market highlights

  • Rising rates and higher volatility resulted in declining bond prices in February.
  • Muni bonds fared better than other fixed income sectors due to strong technicals.
  • We will be patient with respect to buying until more appealing valuations emerge.

Market overview

The S&P Municipal Bond Index declined -0.39% in February as the market experienced bouts of volatility, albeit to a much lesser degree than in equities. The muni market continued to take cues from rising U.S. Treasury yields as stronger economic data, rising inflation, and the anticipated impact of increased budget spending and tax reform caused prices to adjust for a more aggressive pace of Fed rate hikes.

While higher interest rates dragged down fixed income assets broadly, muni bonds continued to fare better versus other sectors due to a strong technical backdrop – firm demand alongside depressed issuance.

Although municipal fund flows were negative in February, this was likely a result of some giveback of January’s historically robust inflows, and year-to-date, net flows still exceed $9 billion. The impact of tax reform has resulted in depressed issuance in 2018, a trend we expect to continue for some time. February issuance was down -24% from the same month last year and -31% versus the month’s 10-year average.


While we still expect issuance to remain depressed versus historical norms in the near-term, it is important to note that March has been the third largest issuance month over the past 10 years, and it’s been the worst performing month on average dating back to 1992. Amidst this historical backdrop, it is our view that any significant pickup in near-term supply could pressure the market. However, the resetting of valuations to more attractive levels could create buying opportunities.

Strategy and positioning

We continue to remain patient with respect to buying and hold a defensive posture. We maintain a short duration bias (lower sensitivity to interest rate movements), an elevated cash position and a barbell yield curve strategy with exposure concentrated in maturities of 0 to 2 years and 20 years+.

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 ...

To obtain more information on the funds including the Morningstar time period ratings, please visit: Strategic Municipal Opportunities Fund, National Municipal Fund, High Yield Municipal Bond Fund, California Municipal Opportunities Fund, New York Municipal Opportunities Fund, New Jersey Municipal Fund, Pennsylvania Municipal Opportunities Fund.

The Morningstar RatingTM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

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