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Municipal market insight

Munis break their streak

October 07, 2019

Highlights

  • The muni market’s 10-month winning streak finally broke in September.
  • We expect interest rate volatility to continue for the near term.
  • Muni valuations have become more attractive relative to Treasuries.

Market overview

After 10 consecutive months of positive performance, the muni market’s winning streak came to an end in September amid persistent interest rate volatility. The S&P Municipal Bond Index declined -0.65% over the month, putting the year-to-date return at 6.57%. Although the Fed cut its target range in mid-September, interest rates ended the month higher given a backdrop of moderate economic growth, slightly higher inflation and some easing in trade tensions. (Bond prices fall when rates rise.)

Compared to Treasury bonds, municipals modestly underperformed across the curve; however, this helped reset relative valuations to more attractive levels, particularly in the front and intermediate part of the curve.

The market tailwinds supporting the recent rally in muni performance lost steam in September. New issuance accelerated given a combination of low rates and a surge of deals designed to work around the elimination of the tax exemption for advance refunded debt. At the same time, rate volatility caused demand to wane, but net flows into municipal bond funds remained positive.

Outlook 

We expect rate volatility will continue as geopolitical uncertainties remain significant. Additionally, muni market dynamics typically turn less favorable at this time of year as issuance picks up after a quiet period in the summer. Historically, October has experienced a 39% month-over-month increase in supply and has been the second worst-performing month of the year on average. Long-term investors should keep in mind that seasonal cyclicality is a natural characteristic of the municipal market.

Strategy

Considering expectations for continued interest rate volatility and seasonal weakness in the muni market, we maintain an overall neutral stance on duration (interest rate risk) via a barbell yield curve strategy with concentrations in maturities of 0-5 years and 20 years+. We continue to hold a favorable view on credit and prefer revenue bonds, lower-rated investment grade credits, and issues in high tax states.

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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 ...
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 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.

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.