Muni Bond Week in Review: Yields are mixed

Municipal bond yields were mixed this past week, caught in a swirl of economic reports and trepidation about the upcoming U.S. presidential election.

The 10-year yield on the AP Municipal Bond index moved in a narrow range and sat at 2.047 percent as of 5 p.m. Eastern time Friday. That's down from last week, when it ended at 2.058 percent.

Shorter-term two-year muni bond yields saw bigger swings. Yields moved from 0.918 percent a week ago to 0.939 percent mid-week, then moderated to 0.922 percent by late Friday. Long-term 30-year muni bond yields dipped to 2.732 percent from 2.737 percent a week ago.

Data released on Friday showed that the U.S. economy added 161,000 jobs in October, and also gained more than previously reported in August and September. A healthy labor market increases the chances that the Federal Reserve will raise interest rates at its December meeting, a move likely to hurt bond prices. Bond investors reacted cautiously to the news, however, amid the uncertainty surrounding the upcoming election. Bond yields and prices move in opposite directions.

In other muni bond news:

__A narrower spread

With so much uncertainty around interest rates, there's little doubt that longer-term bonds look riskier than their short-term rivals. That's because long-term bonds tend to lose more money when interest rates rise. Investors who hold long-term bonds are compensated for that risk with higher yields.

While that gap, or spread, tightened a bit from the previous week, it's still a lot wider than early fall. As of Friday evening, the spread between two- and 10-year muni bonds was 1.125 percent. The gap was less than 1 percentage point in late September.

__ Budget strains on the rise

Underfunded pension liabilities have more than doubled over the past 10 years, hobbling budgets for many of the biggest local U.S. municipalities, according to a new report by credit-rating agency Moody's. Pension costs are also consuming a greater share of budgets. For the 50 largest local governments, pension contributions consumed a median of 5.2 percent of revenues for fiscal 2015, up from 3.6 percent in 2005. Moreover, due to weak investment returns, Moody's expects pension liabilities to grow by roughly 6 percent for fiscal 2016, and another 31 percent in 2017.

The report also looked at which governments have the greatest amount of unfunded debt as a percentage of operating revenues. By that measure, Chicago, Dallas, Phoenix, Houston and Los Angeles topped the list, with liabilities of more than 400 percent of revenues. By contrast, Washington, D.C., Philadelphia and Charlotte, North Carolina, were among the lowest, with total pension debt below their annual income.