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Muni Yields Set for Biggest Weekly Drop in a Month as Sales Ebb

Yields in the $3.7 trillion municipal market fell this week by the most in a month as Treasuries rallied and local borrowing declined.

Ten-year benchmark munis yielded 2.28 percent today, after touching an 11-month low of 2.27 percent yesterday, data compiled by Bloomberg show. The interest rate’s 0.07 percentage point drop this week is the most since mid-April.

Tax-exempt debt is following federal securities, which have gained on political unrest in Ukraine and concern that China’s economy may slow, said David Manges, muni trading manager at BNY Mellon Capital Markets LLC in Pittsburgh.

“A strong performance in the taxable markets has led to a buying binge this week in munis,” Manges said.“We’re the tail on the dog, but we’re wagging nonetheless.”

Treasuries outpaced tax-exempt debt this week. Ten-year muni yields reached about 91.3 percent of the interest rate on benchmark federal bonds yesterday, the highest since May 2. The higher the percentage, the cheaper munis are relative to Treasuries.

States and cities sold about $4.6 billion of long-term, fixed-rate debt this week, the least for a non-holiday week since early April. Issuance is down 27 percent this year from the same period of 2013.

“Accounts have had to buy in the secondary to make up for a lack of primary supply,” Manges said.

As municipalities cut back on borrowing for capital projects, investors are pouring money into mutual funds focusing on local debt. Investors added $616 million to the funds this past week, following a $943 million inflow the week before, the biggest addition since January 2013, Lipper US Fund Flows data show.

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