Municipal bond prices plateaued this summer after a year of slow and steady ascension, but that does not mean the good times are over for this go-to asset class, said Sean Carney, Head of Municipal Strategy within BlackRock’s Global Fixed Income Group . ‘The last couple of months have been more reliant on the income carry component of total return than the price appreciation,’ said Carney. ‘We don’t think it is going to come to an end. It could slow down as we head into year end and the technicals of the muni market turn a bit less favorable than they were during the summer months.’ The BlackRock Strategic Municipal Opportunities Fund , for example, is up 5.1% thus far in 2016, according to Morningstar. The $5.1 billion fund has returned an average of 7.1% annually over the past three years, outpacing 90% of its peers in Morningstar’s municipal national intermediate-term bond category. The fund sports a trailing 12 month yield of 2.5%, according to Morningstar. Carney points out that muni market has produced 14 consecutive months of positive performance, the longest streak on record. He said the impressive performance is aided by record fund flows and a fundamental backdrop that supports municipal credit. Carney attributes the nearly $55 billion of new money added to muni bonds this year to the high quality, low volatility nature of the asset class, the ability for munis to act as a diversifier against equity risk and the sensational demand for income producing assets in the low interest rate environment. ‘Demand for the asset class has been both robust and broad based,’ said Carney. As for the supply side, Carney said the market should see additional issuance in the fall, which could soften prices somewhat and create opportunities for traders to add to their positions. He said he favors revenue bonds, as opposed to G.O. bonds, because of the dedicated revenue streams, as well as the lack of pension risk. Finally, Carney said all the talk about ‘crumbling infrastructure’ coming from both sides of the presidential campaign could eventually be a positive for the muni bond market. ‘A bit more new money would be healthy for the muni market,’ said Carney. ‘We could see an uptick in new issuance. Initially it may weigh on performance but in the end it would be good for these issuers.’
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