BlackRock: Municipal bonds may rebound this summer

BlackRock’s Municipal Market Quarterly Update says municipal bonds, which dropped more than 2% in March, could recover during the summer months. The firm cites solid credit fundamentals, attractive technicals and stronger seasonal demand as reasons to consider re-entering the market.

The report attributed March’s sell-off to rising oil prices linked to geopolitical tensions in the Middle East and a sudden change in interest-rate expectations. “The macro backdrop shifted materially in March, as an oil-driven inflation shock tied to escalation in Iran prompted a sharp repricing of monetary policy expectations-from anticipated rate cuts to potential hikes,” the report noted.

BlackRock also pointed to supply-and-demand factors that weighed on performance. A pickup in new municipal issuance, weaker reinvestment support and net outflows from municipal funds reduced demand while broader market volatility increased, the report said. Those dynamics pushed prices lower and yields higher across the municipal market.

On fundamentals, the firm judged credit conditions to be solid and technical indicators to be appealing. The report wrote that current valuations “may represent a desirable entry point for deploying capital.” It added that if global uncertainties ease, the mix of technical and credit factors could support a rebound in performance.

For positioning, BlackRock recommended a defensive barbell strategy on the yield curve, favoring the 0–5 year and 15–20 year segments. The firm highlighted transportation, housing and corporate municipal sectors as areas with relative value opportunities.

The report noted seasonal patterns that typically benefit munis in June through August, when reinvestment flows tend to rise and new issuance often falls. It also cited recent history: in five event-driven sell-offs since 2020, the municipal market recovered roughly half of its drawdown within about five trading sessions on average.

BlackRock advised selective sector exposure and maturity positioning for investors increasing municipal allocations, noting that the recovery path would depend on the evolution of geopolitical risk and reinvestment demand.