Municipal bond yields jumped to a one-year high following Tuesday's election and surprise victory for Donald Trump.
Muni yields have been drifting higher in recent weeks, ahead of the expected Federal Reserve interest rate increase in December. But bond yields reacted swiftly to the election results, with the yield on the 10-year muni bond leaping 1.04 percent between Tuesday and Thursday.
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The 10-year yield, which sat at 2.045 percent last Friday, ended the short trading week at 2.157 percent as of 5pm Eastern time on Thursday. Bond markets are closed on Friday in observance of Veteran's Day.
Muni yields generally follow the path of Treasuries, which soared this week in the wake of the election. Bond prices and yields move in opposite directions, and prices on Treasuries have cratered. Investors believe that president-elect Trump plans to inject strong fiscal stimulus into the economy with a combination of infrastructure spending and tax cuts. That, in turn, could cause inflation and interest rates to increase faster than expected, which would hurt bond prices.
When it comes to munis, the outlook is even less clear. Trump has proposed cutting tax rates especially for wealthy individuals, which could dampen demand for tax-exempt securities. But he's also proposed a trillion-dollar investment in a variety of infrastructure initiatives, including bridges, tunnels and pipelines, which could potentially provide a significant boost to muni supply.
"It's a mixed bag," says Daniel Berger, senior market strategist with Thomson Reuters Municipal market data. It's also not exactly clear who will finance these projects, and how: Trump has said that some projects might be funded by private companies who are receiving tax credits on the investments.
Others believe that the government may also wind up offering some form of taxable muni bonds. "I think we will see an uptick in spending, but the nitty gritty stuff has to be worked out over the next year or two," says Peter Block, managing director of credit strategy at Ramirez & Co.
Ultimately, the uncertainty likely provided a softer landing for munis. While this week's price drops were significant, they still outperformed other fixed-income assets such as Treasuries. The largest municipal bond ETF, the iShares National Muni Bond ETF, fell 1.5 percent this past week.
Bonds that take longer to mature usually see greater price drops when interest rates rise, and investors who hold longer-term bonds were compensated for that risk with higher yields. Not surprisingly, those riskier bonds were hit even harder than their short-term rivals this week.
Yields on the 30-year muni bond climbed to 2.849 percent as of 5pm on Thursday, up from 2.731 percent last Friday. As of Thursday evening, the gap, or spread, between two and 10-year bonds grew to 1.227 percent. Only a month ago, that spread was just over a percentage point.