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Municipal market insight

Foresight is 20/20: our vision for municipals this year

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

2019 was outside the norm

 

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.

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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. ...
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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 ...