U.S. municipal-bond yields climbed this week by the most in more than a year as a wave of state and local sales overwhelmed the least demand since October.
The interest rate on 20-year general-obligation bonds rose 0.17 percentage point to 3.44 percent in the week through Dec. 13, according to a Bond Buyer index. That’s the biggest increase since the period ended Oct. 6, 2011. The previous mark of 3.27 percent was the lowest since 1965.
Municipal-bond mutual funds added about $311 million in the week through Dec. 12, Lipper US Fund Flows data show, the least in six weeks. Tax-free state and local debt led a fixed-income rally following the re-election of President Barack Obama, who seeks to increase the top federal income tax rate to 39.6 percent from 35 percent.
“It’s tough to say there was a lot of value, at least historically, in recent rates,” said David Manges, muni trading manager at BNY Mellon Capital Markets LLC in Pittsburgh. “The results of the election have washed through the market, and we’re moving onto the next story.”
As muni yields have increased from 47-year lows, the return on state and local debt in 2012 has shrunk. In December, tax-exempts have lost 0.7 percent, according to Bank of America Merrill Lynch data. That would be the worst month for municipals since January 2011, after Meredith Whitney’s failed prediction the previous month of “hundreds of billions of dollars” of local defaults in the following year.
The $3.7 trillion muni market has still earned about 8.2 percent this year, compared with the 2.2 percent return on U.S. Treasuries, Bank of America data show.
States and localities issued about $20 billion of long-term debt in the past two weeks, making it the busiest stretch since June, according to data compiled by Bloomberg.
Supply is poised to decline to $2.8 billion next week, which would be the smallest since August, the data show.
“Given the lack of supply that’s likely to be with us over the next two to six weeks, munis will find some balance” at current yield levels, Manges said.
State and local interest rates are rising faster than their federal counterparts, pushing 10-year muni yields to about 93 percent of those on Treasuries, the highest since Nov. 19, according to data compiled by Bloomberg.
The ratio, a gauge of relative value between the two asset classes, fell to 85 percent this week, the lowest since June 2011, signaling that local debt is relatively more expensive.