January 10, 2020
BlackRock’s municipal bond experts share their market outlook and actions you can take to raise your portfolio’s potential in 2020.
A return to normal is in sight
Just as the term “20/20 vision” refers to normal visual acuity, the year 2020 means a return to normal for municipal bond performance. 2019 was a stellar year for the asset class, with prolonged periods of net negative supply and persistently strong demand propelled by the impact of 2017 tax reform, all against a backdrop of falling interest rates. (Bond prices rise as rates fall.) The S&P Municipal Bond Index barreled past analyst expectations (~4%) to finish the year with a gain of 7.3%.
We expect the market’s positive momentum to continue in 2020, but to expect gains similar to 2019 would be unrealistic. We see potential for slightly higher interest rates in the first half of 2020 weighing on muni bond prices and possibly causing issuance to be lower than market consensus (which is lofty, in our opinion). The latter half of the year, however, may bring greater volatility as the U.S. presidential election comes into focus, which could push rates lower and muni bond prices higher.
Our forecast for muni returns this year is between 2 and 3%, comprised largely of coupon income as opposed to price appreciation. Although lower than last year, these more “normal” returns for munis, packaged with the benefits of tax exemptions, consistent income and diversification from equity volatility, are compelling enough to move cash off the sidelines and stay invested.
2019 was outside the norm
Cumulative flows in/out of municipal mutual funds
Source: Investment Company Institute, as of 12/31/19. Based on weekly data.
Investors will need to be more tactical as market conditions become increasingly dynamic in the coming year. We anticipate higher levels of interest rate volatility, emerging risks affecting the municipal credit environment, and a renewed interest from non-traditional buyers as taxable issuance increases. These factors will require investors to be keenly attentive and take swift action just to keep up with the market’s average return. A more practical approach is to invest in flexible municipal strategies that adapt as markets change.
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 Committee. ...
Read more
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 firm's ...
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 Bond ...
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 performance is for illustrative purposes only. Index performance does 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 January 10, 2020. 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. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
Prepared by BlackRock Investments, LLC, member FINRA
Not FDIC Insured | May Lose Value | No Bank Guarantee
© 2020 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
USRMH0120U-1062797