Municipal-bond week in review: A big bounce for yields

Municipal bond yields climbed this past week, as a steady jobs report fed expectations that the Federal Reserve will raise interest rates later this year.

The 10-year yield on the AP Municipal Bond index was 1.979 percent as of 5 p.m. Eastern time on Friday, up from 1.878 percent last Friday, and the highest it's been since April.

The U.S. added 156,000 jobs last month, according to the Labor Department. Though that number was lower than some analysts had forecast, most described it as a solid indication that the economy is gaining strength.

The sharp rise in yields began earlier in the week, following hints that the European Central Bank might end its bond-buying program earlier than planned. An end to that stimulus program would likely depress bond prices, which move inversely to yields.

The increase in yields wasn't good news for investors who already own muni bonds. The largest muni bond exchange-traded fund, the iShares National Muni Bond ETF, had a weekly loss of 0.5 percent.

Meanwhile, the spread, or gap, in yields between 2-year and 10-year muni bonds grew wider this week. Longer-term bonds generally see greater price drops than short-term bonds when interest rates rise. The spread between 2- and 10-year bonds was 1.053 percentage points on Friday, up from 1.018 percentage points the previous week.

In other muni bond news:

— New reports assess state pension liabilities.

Two reports released this week took a look at the state of pension liabilities around the country. Municipalities with greatly underfunded pensions run the risk of not being able to pay their debt on time.

State-run pensions are underfunded by over $1.2 trillion dollars, with that amount projected to grow to $1.7 trillion within 48 months, according to a report from Moody's Investors Service.

Liabilities are growing mainly because the funds' investment returns are falling significantly short of projections, Moody's said. The five states with the largest pension liabilities are Illinois, Connecticut, Alaska, Kentucky, and New Jersey.

Separately, a report from the Center for Retirement Research looked at how states, cities and local governments are coping with the cost of state pension plans and other post-employment benefits.

Study authors Alicia Munnell and Jean-Pierre Aubry calculated how much of states' revenue is required to service their pension and benefit plans. Cost burdens above 15 percent of revenue are problematic, they said, and those that exceed 25 percent are untenable.

The good news: Two-thirds of states currently have cost burdens below 15 percent of revenue, with about a quarter below 10 percent, according to the study.

Some states, however, are in dire straits: Illinois, New Jersey, Connecticut, Hawaii, and Kentucky face payments in excess of 25 percent of revenue. In addition, Massachusetts, Rhode Island, and Delaware are headed for trouble, with pension and benefit costs above 20 percent of revenue. A handful of counties, mainly in California, and eight cities are also struggling, with extremely high costs exceeding 40 percent of revenue.