Munis break their streak
[Pages:2]Muni seasonal weakness continued in October
November update
? Interest rate volatility prompted another month of negative total returns.
? Below average issuance was counterbalanced by a slowdown in demand.
? November could provide opportunities ahead of seasonal strength in December and January.
Peter Hayes, Head of the Municipal Bonds Group James Schwartz, Head of Municipal Credit Research Sean Carney, Head of Municipal Strategy
Market overview
Municipals experienced their third consecutive month of negative performance in October amid rate volatility as the market priced in more hawkish Federal Reserve policy expectations. Modest underperformance versus U.S. Treasuries resulted from a continued recalibration in valuations as rhetoric on infrastructure legislation indicated less of an impact on the asset class than initially expected. The S&P Municipal Bond Index returned -0.10%, bringing the year-to-date total return to 0.88%. Shorter-duration and higher-rated bonds were the best performers.
Issuance underwhelmed versus historical norms at just $40 billion, down -44% year-over-year and -16% below the 5year average, bringing the year-to-date total to $380 billion. Taxable issuance accounted for 28% of supply, the largest proportion since February. As a result, October bucked its seasonal trend and posted net negative tax-exempt issuance with reinvestment income (from maturities, calls, and coupons) slightly outpacing supply. Despite this dynamic, oversubscriptions remained low at just 3.9 times, held back by elevated bid wanted activity and limited dealer participation.
Fund flows remained positive, albeit within a lower range. While demand tends to seasonally moderate into year-end due to tax-loss swapping, we would view any outflows, should they materialize, as temporary.
We believe the recent reset in ratios and spreads could provide an attractive buying opportunity ahead of more favorable seasonals. The market has historically benefited from strong year-end performance, which we expect to continue. Over the past five years, December and January have accounted for 38% of full-year performance.
Strategy insights
We maintain a neutral stance on duration within a barbell yield curve strategy. We prefer lower-rated investment grade bonds, particularly in the front-end of the yield curve, as well as select high yield credits. We maintain a favorable view on the tax-backed, transportation, healthcare, and education sectors.
Duration
Short
Nov Neutral
Oct
Long
Yield curve
Barbell strategy, preferring 0-5 and 20+ years.
Overweight
? Higher quality states and essential-service bonds. ? School districts and local governments supported by
property taxes. ? Issuers that should benefit from the re-opening of
the economy. ? Select issuers in the high yield space.
Underweight
? Speculative projects with weak sponsorship, unproven technology, or unsound feasibility studies.
? Senior living and long-term care facilities in saturated markets.
November 2021 | Municipal Market Update
USRRMH1121U/S-1917746-1/2
Credit headlines
Only two states, Virginia and New Jersey, held gubernatorial and state legislative elections (excluding Virginia's senate). In Virginia, Republican Glenn Youngkin emerged as governor-elect, while his party also took the majority from Democrats in the House of Delegates, resulting in split control as the Democratic-controlled Senate had no elections this year. In New Jersey, incumbent Governor Phil Murphy squeaked by Republican challenger Jack Ciattarelli. Democrats will hold on to majorities, albeit by slimmer margins, in both the New Jersey Assembly and Senate. Voters in six states weighed in on 24 ballot measures that address a variety of topics important to the municipal bond market, including taxes, fiscal policies, and infrastructure. In addition, voters determined the fate of an estimated $29 billion in bond measures to finance capital projects. This figure is roughly half of the bond referenda offered during last year's presidential election and the lowest since 2017, according to IHS Markit. Among the 10 largest bond measures, about half are for funding school improvements, with Texas proposing the most bonds. At least $19 billion of the $29 billion proposed is slated to pass, according to preliminary results.
The higher education sector is in a much healthier position this fall following a difficult 2020. Early indications point to a modest rebound compared to the prior year, when twothirds of colleges reported declines in enrollment. Net tuition revenue numbers also turned sharply negative, indicating pricing power may have peaked. Despite these headwinds, federal relief aid of $76 billion granted during the pandemic stabilized operations and offset revenue declines. Schools that benefit from large to moderate endowments have been bolstered from exceptional investment returns. We maintain our positive outlook for flagship private and public universities; however, pockets of uncertainty remain. Enhanced due diligence is required, particularly for low single-A and triple-B-rated schools.
Municipal and Treasury yield movements
2.50%
2.00 1.50
1.56
1.93 1.69
1.00 0.50 0.00
0.50 0.25
2-year
1.19 0.64 5-year
1.21
10-year
30-year
AAA Muni 10/31/21 9/30/21 Treasuries 10/31/21 9/30/21
Sources: BlackRock: Bloomberg.
Municipal performance
Oct 2021
S&P Municipal Bond Index
-0.10%
Long maturities (20+ yrs.)
-0.06%
Intermediate maturities (3-15 yrs.) -0.17%
Short maturities (6 mos.-4 yrs.)
-0.02%
High yield
-0.32%
High yield (ex-Puerto Rico)
-0.28%
General obligation (GO) bonds
-0.09%
California
-0.05%
New Jersey
-0.30%
New York
-0.09%
Pennsylvania
-0.09%
Puerto Rico
-0.52%
Sources: S&P Indexes.
YTD 0.88% 2.24% 0.38% 0.35% 5.12% 5.19% 0.21% 0.48% 1.70% 1.11% 1.19% 4.22%
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 10, 2021, 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.
?2021 BlackRock, Inc. All Rights Reserved. BlackRock is a trademarks 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
374000-1121
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