Muni bonds buck the trend

Municipal market highlights

Munis posted positive results in June, typically the market’s third-worst month.
Issuance remains muted post tax reform while demand remains remarkably firm.
Valuations have slightly improved and typical summer strength may provide a boost.

Market overview

Muni bonds rewarded investors with an unexpected positive return in June (+0.13%), against the odds that a stark pickup in supply would saturate the market as history suggests for this time of year. The market’s persistently strong technical environment provided solid footing for muni bonds to benefit from interest rates remaining range-bound amid geopolitical uncertainty and mounting fears around the impact of international trade wars . (Bond prices typically move inversely with interest rates.)

Issuance continues to be depressed in 2018 as a result of tax reform (which eliminated the exemption for advanced refunding bonds), down 19% year-to-date versus the same period last year and remaining below the 5-year average. The reinvestment of payouts from calls, coupons and matured bonds outweighed gross supply in June, driving prices higher. The benefits of this net negative supply environment were slightly mitigated by activity in the secondary market, where dealer inventories remain bloated.

Demand has remained firm, with eight consecutive weeks of mutual fund inflows since the tax-time surge in short-term fund selling. Short and intermediate term issues outperformed longer term bonds in June. High yield muni bonds were among the stronger performers of the month, led by Puerto Rico and tobacco bonds. Prerefunded bonds and New Jersey issues also provided generous returns for the month.

Outlook

Heading into the late summer months, historically a period of net negative supply following the spring supply push, we hold a positive view on the muni market, particularly as relative valuations have reset to slightly more attractive levels. Looking further ahead into the fall, we anticipate taking a bit more caution as we watch for event risks relating to a potential third Fed rate hike, midterm elections, and the curtailment of the tax benefit for pension buyers.

Strategy and positioning

As valuations have become slightly more attractive and historical seasonal trends suggest favorable conditions are around the corner, we’ve shifted to a slightly longer-than-neutral stance on duration (interest rate risk) while maintaining a barbell yield curve strategy. We prefer lower-rated investment grade credits and revenue bonds for their ability to provide income, and we remain neutral on high yield.

Article was originally on BlackRock.com

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.

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 July 9, 2018, 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.

©2018 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.

Prepared by BlackRock Investments, LLC, member FINRA

Not FDIC Insured | May Lose Value | No Bank Guarantee

540527

Loading PDF

Disclaimers