Muni 10-Year Yields Rise to 6-Month High as U.S. Cuts Approach

Yields on 10-year municipal bonds rose to the highest level in six months as U.S. state and local governments prepare for a $1.2 trillion automatic federal budget reduction.

The interest rate on benchmark AAA munis maturing in 10 years jumped by 0.03 percentage point to 1.88 percent at 4 p.m. in New York, according to data compiled by Bloomberg. It’s the biggest increase for the tax-exempt securities in two weeks and the highest yield since August, the data show.

Yields also increased this week to the most since Feb. 13 on taxable Build America Bonds, rising to 4.43 percent on Feb. 19, according to Bloomberg data.

The Build America Bonds program, which gives states and cities a 35 percent subsidy on interest, is among hundreds facing reductions as a result of legislation passed in 2011 to shrink the federal deficit by $1.2 trillion over a decade. Congress delayed them until March 1. President Barack Obama’s administration has said the payments would drop by $255 million, or 7.6 percent, unless Congress averts the reductions.

Investors are “concerned with the potential for deficits at the state and local level,” said David Manges, muni trading manager at BNY Mellon Capital Markets LLC in Pittsburgh. “The sequester is going to draw money away from municipalities, specifically in the BABs program, but arguably in other ways as well.”

North Carolina sold about $697 million in AAA rated general-obligations today, with some 10-year debt priced to yield 2.03 percent, Bloomberg data show. States and localities are set to issue about $6.6 billion this week, the most since the period ended Feb. 1, the data show.

Before it's here, it's on the Bloomberg Terminal.