Municipal Rates Drop to Six-Week Low as U.S. Treasuries Rally

Yields on tax-exempt municipal bonds fell to their lowest level in six weeks as Treasury interest rates dropped on concern the European debt crisis is worsening and the U.S. economic recovery is moderating.

Benchmark 10-year tax-exempt yields fell more than one basis point to 1.96 percent at 1 p.m. today in New York, the lowest since March 6, according to data compiled by Bloomberg. A basis point is 0.01 percentage point. The yield reached a record low of 1.74 percent on Feb. 2.

While local-government borrowing costs have been falling this month, they are still higher than comparable-maturity Treasuries, making them more attractive to investors, Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets LLC in New York, said in a telephone interview.

Municipals due in 10 years yielded 100.2 percent of similar-maturity Treasuries on average during the past month, Bloomberg data show. That’s higher than the 97 percent average for the year.

“As the crossover ratio improves, it’s a comparative advantage for the muni product,” Yosca said. “And Treasuries have done nothing to hurt us in the last month.”

Yields on 10-year Treasuries have dropped 25 basis points in April while those on municipals have fallen 17 basis points, Bloomberg data show. Today, the 10-year Treasury yield fell two basis points to 1.95 percent, according to Bloomberg Bond Trader prices.

States and cities are set to borrow $8.7 billion this week, down from $10.4 billion during the second week of March, the busiest seven-day period this year.

“The calendar isn’t overwhelming by any means,” Yosca said.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net