Munis break their streak

Munis break their streak

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.

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

Market views

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.

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-overmonth increase in supply and has been the second worstperforming 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 insights

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, lowerrated investment grade credits, and issues in high tax states.

Duration

Oct

Short

Neutral Sept

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

OCT 2019|Municipal Market Update

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Credit headlines

The Metropolitan Transportation Authority board of directors voted unanimously to approve its historic $51.5 billion capital spending proposal for 2020-2024. The plan marks a 70% increase over the agency's previous fouryear plan, and its largest by far. However, the plan faces significant risks given that close to half of the funding would come from new or untested fee and tax revenues, notably "congestion pricing" on tolls in Manhattan, as well as from federal, state, and city monies that still require approvals.

In Michigan, an extended strike by the United Auto Workers at General Motors plants could significantly dent economic activity and reduce the state's tax coffers. While Michigan's economy has become more diversified in recent years, auto manufacturing still accounts for 7% of its private-sector wages and salaries, compared to less than 2% nationally. General Motors has 15 plants in Michigan and employs about 49,000 residents. News reports have estimated losses in the state's income tax collections at roughly $440,000 per day. In more positive news for the state, although it took nearly $1 billion in line-item spending vetoes, Governor Whitmer signed the new state budget just hours before the October 1st deadline.

Municipal and Treasury yields

3%

2 1.62

1

1.22

1.55 1.23

1.67 1.42

2.11 2.01

0 2-year

AAA Muni 9/30/19

5-year 8/31/19

10-year

30-year

Treasuries 9/30/19 8/31/19

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

Sep 2019 YTD 2019

-0.65

6.57

-0.65

9.49

-0.78

6.18

-0.29

2.43

0.00

9.57

-0.10

8.74

-0.69

6.34

-0.71

6.71

-0.79

7.36

-0.76

6.42

-0.64

6.93

0.60

14.77

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 October 7, 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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