BlackRock is expecting a banner month for municipal bonds. November has been the best month of the year for municipal bonds over the last 10 years, averaging a total return of 1.26%, according to Patrick Haskell, head of BlackRock's municipal bonds group. Combined with December's historically strong performance, the fourth quarter has been the top-performing period of the year, he said. "We anticipate a similar dynamic in 2025," Haskell wrote in a recent note. BlackRock manages over $181 billion in municipal assets for clients. Contributing to that strong showing has been November's average 31% month-over-month decline in issuance over the past five years, he said in a follow up email with CNBC. "Our primary markets team anticipates a similar slowdown in supply this year, further strengthening technicals," he added. "While October delivered unusually strong returns, we believe ... supportive dynamics position municipals for continued outperformance into year-end." Municipal bonds are favored by wealthy investors since the income earned is free of federal tax and, if the holder lives within the state in which the bond is issued, exempt from state tax. Proceeds from the bond sales are typically used to fund infrastructure and public projects. Yields remain attractive, Haskell said. The iShares National Muni Bond ETF currently has a 3.33% 30-day SEC yield. For earners in high-tax states in the top tax bracket, that could mean a tax-equivalent yield nearing 6%. MUB YTD mountain iShares National Muni Bond ETF year to date Despite munis' recent strength, the assets remain undervalued and offer a compelling entry point for investors, Haskell said. "The interest rate environment is expected to stay favorable amid expectations for continued policy easing by the Federal Reserve," he told CNBC. "Municipal valuations remain compelling compared to taxable alternatives, and the steep yield curve offers opportunities to lock in durable income — conditions that should sustain robust demand for the asset class." Fundamentals also remain exceptionally strong heading into the end of the year, he noted. Finding opportunities Haskell and his team advocate a barbell yield-curve strategy and prefer high-quality transportation, housing and corporate sector munis. That includes suburban local governments and school districts since they benefit from reliable property tax revenue, he said. "When evaluating these issuers, we prioritize those with sufficient fund balances, a broad and diverse tax base, and manageable levels of debt — including pension obligations — while also assessing legal risks and any contingent liabilities," Haskell said. He prefers smaller, high-quality government bonds with incremental yield and strong diversification opportunities for the firm's separately managed accounts. BlackRock is also overweight on prepaid gas munis, which municipalities use to pay for long-term supply of natural gas or energy. "These offer attractive spreads from high-quality counterparties with shorter durations, serving as a ballast in a municipal portfolio," Haskell said. "The main risks are related to counterparty and structural factors, rather than commodity price fluctuations." The firm focuses on large money center banks and stringent bond documentation. In addition, BlackRock is overweight on housing bonds, as well as national and large regional health systems. The firm is also selectively investing in high-yield munis.
