Unmasked potential for munis in 2021
Our outlook for municipals this year
BlackRock’s municipal bond experts share their market outlook and the actions you can take to raise your portfolio’s potential in 2021. Peter Hayes, Head of the Municipal Bonds Group Sean Carney, Head of Municipal Strategy
The assets that command demand 138% of its outflows from the March selloff, while the Even as the pandemic spurred the most abrupt and severe high yield sector regained only 37%. In our view, high selloff of modern history, the S&P Municipal Bond Index yield is poised to readily outperform investment grade. finished 2020 with a gain of 4.95% as strong demand for Nevertheless, investors need to be highly selective as the muni bonds broadly outpaced supply. We expect the impact of the pandemic varies across market segments positive momentum to continue in the coming year, albeit and issuers. with moderated returns. Demand for munis has remained durable Municipal bond mutual funds have attracted positive Net flows into municipal bond mutual funds flows from investors in each of the past seven years — since the extreme rate volatility infamously known as the “Taper Tantrum” stressed fixed income assets broadly in 2013. Demand for municipal bonds continues to be supported by highly accommodative monetary policy, while the potential for higher taxes under the new political regime underscores the appeal of tax-advantaged investments. Notching a solid return for a tumultuous 2020 also bodes well for munis in the months ahead as positive returns tend to create further demand. Billion Some volatility in fund flows can be expected given the forecast for low- to mid-single-digit returns and the likelihood of interest rates moving modestly higher and -20 creating a steeper yield curve. Nevertheless, we anticipate another year of net positive flows into the asset class. -40 We view high yield municipals as a particularly appealing area to look for opportunities in 2021. The sector has -60 lagged in the broader muni rebound from the pandemic- induced selloff, suggesting the potential existence of underpriced assets and room to move higher. By the end Source: Investment Company Institute, as of 12/31/2020. of 2020, investment grade municipals had recouped
Past performance is no guarantee of future results. The index returns are shown for illustrative purposes only. It is not possible to invest directly in an index.
January 2021 | Municipal market outlook
USRRMH0121U/S-1480478-1/4 Municipals have provided consistent income over time Composition of annual total return