Muni bonds push higher

May 10, 2021

Monthly update

• Munis posted another strong month amid falling rates and favorable market dynamics.
• Seasonal weakness typical of mid-April was averted due to the delayed tax-filing deadline.
• Although valuations appear rich, economic and political themes look positive for municipals.

Market Overview

Municipal bonds posted strong performance in April, with the S&P Municipal Bond Index rising 0.80% for the month, bringing year-to-date total return to 0.54%. Interest rates rallied lower, while the muni market continued to benefit from a favorable supply-demand backdrop and improving fundamentals. Valuations continued to richen with muni-to-Treasury ratios in the intermediate and long end of the curve pushing closer to the all-time lows set in February. Longer duration and lower quality bonds were the stronger performers in April. Conversely, tobacco bonds struggled on news of the U.S. Food and Drug Administration (FDA) considering a ban on menthol and a lower nicotine level in cigarettes.

Issuance was moderately elevated in April at $35 billion, down -22% from the robust levels in March, but 21% above the 5-year average. Week-to-week volatility in the new-issue calendar avoided consecutive weeks of significantly above-average supply, putting less stress on the market. New issues were oversubscribed by 7 times on average.

Strong demand continued unabated in April. Aided by the delayed tax filing deadline, the market avoided seasonal fund flow weakness typically experienced in mid-April and saw consistent and robust inflows throughout the month. Long-term funds once again garnered the bulk of inflows.

Outlook

While muni bond valuations look unattractive from a historical perspective, we maintain a constructive view of the asset class over the long-term. We believe municipal fundamentals will continue to benefit from a combination of economic reopening, substantial fiscal aid, and a focus on infrastructure. Although infrastructure details are yet to be finalized, it seems possible that higher tax rates will drive increased demand for muni bonds.

Strategy

We maintain a neutral stance on duration (interest rate risk) within a barbell yield curve strategy. We continue to hold a preference for lower-rated credits, revenue bonds and sectors that have been more impacted by the pandemic such as transportation, travel-related (hotel tax, airport, etc.) and health care.

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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.