Muni Yields at 23-Month High as Bernanke Unsettles Market

Yields in the $3.7 trillion municipal-bond market rose to the highest in almost two years, following U.S. Treasuries, amid concern that the Federal Reserve will halt monthly debt purchases by the middle of 2014.

The yield on general-obligation munis maturing in 20 years rose 0.21 percentage point to 4.37 percent this week, the highest since July 28, 2011, according to Bond Buyer Index data. The index has jumped 0.44 percentage point in the past two weeks, the biggest increase since January 2011. Bonds in the index have an average Moody’s Investors Service rating of Aa2, third-highest.

Investors pulled $2.2 billion from muni-bond mutual funds this week, Lipper US Fund Flows data show, the heaviest outflow this year, as a Bloomberg survey of 54 economists said the Federal Reserve will end buying by June 2014. More than $5 billion was drained from funds in the past three weeks, according to Lipper.

Comments this week by Federal Reserve Chairman Ben S. Bernanke on the central bank’s outlook “sent munis into a tailspin,” said Dan Toboja, vice president of municipal trading at Ziegler Capital Markets in Chicago.

Rising yields and continued outflows have left the market “in a state of disarray,” he said in an e-mail.

Interest rates on top-rated munis maturing in 10 years rose about 0.05 percentage point to 2.46 percent as of 1 p.m. in New York, data compiled by Bloomberg show. That is the highest since November 2011. The yield on similar maturity Treasuries has surged 0.36 percentage point this week, the most since August 2009.

States and cities are poised to sell $8.4 billion in debt next week, including a $1.3 billion general-obligation bond sale by Illinois, its biggest since May 2012.

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