Munis Overcome a Glut of Issuance
- Rising interest rates pressured bond prices in October.
- Record-high monthly issuance was well absorbed amid strong demand.
- We expect a favorable supply-demand backdrop through year end.
Municipals posted modestly negative total returns in October, with the S&P Municipal Bond Index finishing the month down -0.14%. Interest rates moved higher as economic data remained firm and the market began to price in an increased likelihood of a Democratic sweep, which, at the time of this writing, appears unlikely. (Bond prices fall when rates rise.) Credit sectors fared better than the more rate-sensitive segments. Muni-to-Treasury ratios in the intermediate and long end of the yield curve declined, but remain high versus the historical average.
October posted the largest monthly issuance on record at $71 billion. Municipalities pulled forward deals ahead of anticipated election uncertainty. Despite the acceleration, supply was well absorbed given the expectation for a corresponding dearth of issuance in November and December. On average, new deals were oversubscribed by 4.6 times, up from 4.2 in September.
Demand remained firm throughout the month of October with mutual funds posting net inflows each week. The market has now fully recouped the $46 billion of outflows during the height of the pandemic. While some tax loss selling may emerge into year end, we anticipate continued strong demand for the asset class going forward.
We anticipate muni issuance will be muted through year end given the recent pull forward. Demand remains strong as municipal bonds continue to offer compelling value, particularly as the slow removal of uncertainty post-Election Day provides more stability for the asset class. Additionally, we believe the municipal market will benefit from an eventual agreement on fiscal stimulus.
We have shifted to a long duration posture (greater sensitivity to interest rate movements) given our expectation for a favorable supply-demand backdrop. We hold a bias for higher quality assets overall and continue to advocate careful security selection as the impact of the pandemic varies across market segments.
Head of Municipal Bonds
Head of Municipal Strategy, BlackRock Investment Strategy Team
James Schwartz, CFA
Head Credit Research Analyst, Municipal Credit Research
Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance.