Municipal market insight

Muni bonds outrun rising rates

April 12, 2021

Monthly update

• Municipals posted gains in March despite rapidly rising interest rates.
Although valuations appear rich, we expect supply and demand dynamics to remain favorable.
Federal aid to state and local governments should help underpin municipal fundamentals.

Market Overview

While most fixed income asset classes posted negative returns for the month of March, the broad S&P Municipal Bond Index posted a gain of 0.55%. It was a challenging month for bond markets generally as the passage of additional fiscal stimulus and rising optimism for further reopening of the economy drove interest rates higher. (Bond prices fall when interest rates rise.) Municipals, however, rebounded from their temporary value-driven correction of late February. Longer duration and lower credit quality muni bonds were the better performers.

Issuance at $45 billion was 59% above the 5-year average for the month of March. A large and diverse new-issue calendar offered opportunity for investors to put cash to work at attractive levels. As a result, new issues were oversubscribed by 6.5 times on average versus just 4.6x in February. Notably, taxable deals fell to just 19% of total issuance, down from 31% earlier in the year, as higher interest rates made the advance refunding of tax-exempt debt in the taxable municipal market less economical.

After a brief outflow early in the month, retail demand firmed alongside strong muni bond performance. Inflows were led by long-term muni bond mutual funds.


Although valuations remain historically rich, we maintain a constructive view on the asset class. Supply is expected to be manageable and the extension of Tax Day should help the market avoid weakness that is typical in April due to investors selling securities to pay tax bills. Additionally, the $350 billion in direct aid to state and local governments provided by the American Rescue Plan should help underpin municipal fundamentals, which have already benefited from better-than-expected revenue collections.


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 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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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
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
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 ...

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