Muni bond week in review: Yields bounce around

Municipal bond yields bounced up and down in a messy week full of speculation about the direction of interest rates and the White House.

The 10-year yield on the AP Municipal Bond index fell early in the week, only to climb and then fall again. It was at 2.052 percent Friday at 5 p.m. Eastern time, down from 2.075 percent a week earlier. It had climbed as high as 2.081 percent on Thursday.

The two-year yield on the index fell to 0.918 percent from 0.929 percent a week earlier, while the 30-year yield rose to 2.733 percent from 2.689 percent.

With economic growth looking solid, investors are increasingly convinced that the Fed will raise interest rates in December. On Monday, St. Louis Federal Reserve President James Bullard agreed that December will likely bring a rate increase, but added that increases beyond that could be a long way off. Yields fell on Friday after the Federal Bureau of Investigation said it was taking another look at emails linked to presidential candidate Hillary Clinton.

Emails aside, a recent spate of good economic news has helped to send yields higher in recent weeks. Because bond yields and prices move in opposite directions, October has been a tough month for muni bond fund investors. Shares of the largest municipal exchange-traded fund, the iShares National Muni Bond ETF, fell 0.2 percent this past week. They have lost 1.1 percent in October.

Longer-term bonds are more sensitive to increases in interest rates than short-term bonds, and their increased risk means they typically carry higher yields. As of Friday, investors who hold bonds that take 10 years to mature get 1.134 percentage points more in yield than those holding two-year munis, according to the AP Municipal Bond Index. That's down slightly from a week earlier.

In other muni bond news:

__Ranking the states.

Muni bond investors beware: Across the country, credit quality has been on the decline for state governments in 2016, according to a report from investment management firm Conning, which manages $11 billion of municipal bonds.

U.S. state revenues fell 2.5 percent during the second quarter of 2016 from a year earlier, largely due to depressed oil prices, weak stock markets and lower corporate profit. At the same time, states are spending more: Expenditures in the fiscal year that ended in June increased by 5.5 percent over the previous year.

Colorado, New Hampshire, Tennessee, and Utah rank highest in terms of credit quality, owing to their strong economic growth and relatively low levels of debt, says Paul Mansour, Conning's head of municipal research.

Among the lowest-ranked states — West Virginia, Kentucky, New Mexico, Connecticut, and Oklahoma — are several energy-dependent economies that are struggling with falling oil prices. Overall, however, most states are seeing a slowdown from the strong growth coming out of the Great Recession. That could mean trouble ahead for munis.

"We think the corporate credit cycle has turned negative, and munis typically trail that," says Mansour.