Munis “hang 10” at summer end

Durable demand for munis in a stream of supply

Highlights

? 2019 is on track to be the best year for municipal fund flows on record.

? Elevated supply numbers are largely attributable to taxable issuance.

? November is known for its seasonal drag, while year end has seen many rallies.

Peter Hayes, Head of the Municipal Bonds Group James Schwartz, Head of Municipal Credit Research Sean Carney, Head of Municipal Strategy

Market views

The S&P Municipal Bond Index returned 0.15% in October, bringing year-to-date gains to 6.73%. Interest rate volatility remained elevated and the yield curve steepened over the month as domestic economic data trended weaker, tensions around world trade and Brexit eased, and the Fed announced another rate cut.

The most important trend we're watching today is the advance refunding of tax-exempt debt using taxable muni bonds. (Advance refunding is the issuance of new debt at lower interest rates to pay down existing highercost debt.) While the new tax law has eliminated the use of tax-exempt bonds to advance refund outstanding bonds, rates have been low enough that issuers can still reap significant savings when they forgo the tax exemption and refund their debt in the taxable municipal market. This dynamic has resulted in elevated supply and is likely to continue should rates remain range bound.

At a robust $55 billion, October was the largest single issuance month since December 2017, when the market was inundated with new supply ahead of tax reform taking effect. Demand for municipals has remained strong, driven largely by retail investors in need of a tax haven. With 43 consecutive weeks of mutual fund inflows, 2019 is expected to be the best fund flow year on record.

While November has historically seen a drag, December and January have been more favorable as the market positions for an acceleration of demand in the new year.

Strategy insights

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.

Duration

Short

Nov Neutral

Oct

Long

Yield curve Barbell strategy, preferring 0-5 and 20+ years

Overweights ? State tax-backed and essential-service bonds,

particularly in the Northwest, Sun Belt and Plains ? School districts

Underweights ? States and locals with poorly funded pensions (IL, NJ,

KY, PA, CT) ? Single-site hospitals in Medicaid non-expansion states ? Speculative projects with weak sponsorship, unproven

technology or unsound feasibility studies

NOV 2019|Municipal Market Update

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Credit headlines

Chicago Mayor Lori Lightfoot released her 2020 budget proposal that aims to close the city's $838 million shortfall with recurring and one-time actions such as spending cuts, new taxes and debt service savings. The budget depends upon the state passing legislation permitting a graduated real estate transfer tax and extra federal reimbursements for ambulance transport of Medicaid patients. The significant use of one-time revenue to close the gap has bought the city some time with rating agencies; however, S&P cited that structural reform must be achieved by 2020 to preserve Chicago's BBB+ rating. Fitch rates the city at BBB-, the lowest investment grade rating, and Moody's has it a notch below investment grade at Ba1. The market responded with limited activity and elevated credit spreads hovering around 125 to 130 basis points, which is notably higher compared to similar-sized U.S. cities.

California has now suffered two years of significant damage from wildfires. While the state has emergency reserves that can be used to support disaster relief, such as backfilling property taxes due to lower reassessments given the damage, there could be short-term interruptions to other revenue sources, such as sales and hotel taxes, as residents and businesses are displaced. More concerning is that homeowners in fire threat areas are at risk of losing property insurance or seeing significant increases in their premiums. The inability to adequately insure properties will inevitability hurt California's housing market in these disaster-prone areas. In addition, rolling blackouts being employed by utility companies are negatively impacting a state that is currently growing faster than the nation, with estimates ranging from $200 million to $2 billion in lost economic output. Despite these risks, there are resources available at local, state and federal levels that will limit default risk and provide aid to communities impacted by the fires.

Municipal and treasury yields

3%

2

1.52

1

1.11

1.52 1.15

1.69 1.49

2.17 2.06

0

2-year

5-year

AAA Muni 10/31/19 9/30/19

10-year

30-year

Treasuries 10/31/19 9/30/19

Sources: BlackRock; Bloomberg.

Municipal performance analysis

S&P Municipal Bond Index Long maturities (20+ yrs.) Intermediate maturities (3-14 yrs.) Short maturities (6 mos.-3 yrs.) High yield High yield (ex-Puerto Rico) General obligation (GO) bonds California New Jersey New York Pennsylvania Puerto Rico

Oct 2019 YTD 2019

0.15

6.73

0.04

9.53

0.19

6.38

0.31

2.74

0.19

9.77

0.21

8.97

0.15

6.50

0.17

6.89

0.14

7.51

0.07

6.49

0.12

7.06

0.04

14.81

Source: S&P Indexes.

Investment involves risk. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income from tax-exempt bonds may be taxable. Some investors may be subject to Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Past performance is no guarantee of 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 November 8, 2019, 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. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader. ?2019 BlackRock, Inc. All Rights Reserved. BlackRock is a registered trademark of BlackRock, Inc. 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

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