Yields for municipal bonds climbed this week, and the 10-year yield on the AP Municipal Bond index hit its highest level in a month.
Munis maturing in 10 years are offering yields of 1.799 percent, as of 5 p.m. Eastern time. That's up from 1.756 percent a week earlier and is the highest level since Aug. 9, when it sat at 1.815 percent. The yield on 30-year munis jumped to 2.349 percent from 2.285 percent, its highest level since June.
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The rise in yields began mid-week, after the European Central Bank indicated that it would end its bond-buying program, and continued in earnest on Friday after comments from Federal Reserve officials hinted that an interest-rate increase is on the horizon. As is typical, the moves in muni yields were similar to those in U.S. Treasurys, which also saw yields rise to the highest level in a month.
Since bonds' yields move inversely from their prices, investors saw prices on muni bonds and muni bond funds dip this week. The iShares National Muni Bond ETF, the largest municipal-bond exchange-traded fund, fell 0.2 percent for the week.
Meanwhile, the spread between 10-year munis and the 2-year variety continued on a downward trend. As of Friday afternoon, bonds that take 10 years to mature yielded 1.065 percentage points more than the 2 year munis, according to the AP Municipal Bond Index.
While that is only slightly lower than the previous week's 1.071 percentage point spread, it is significantly narrower than the 1.197 percentage point spread a month earlier. Longer-term bonds are riskier for investors to own, because their prices are more sensitive to changes in interest rates, and they typically offer higher yields.
Among other trends moving municipal bond prices:
— Relief in sight for Puerto Rico?
After months of drama related to Puerto Rico's troubled economy and defaults on debt, there were glimmers of a turnaround. The bond market responded favorably to the White House appointment of a seven-member control board to oversee the islands' finances, prompting a modest rally for some of its better-rated bonds in August, the heads of BlackRock's municipal bond group wrote in a recent report.
— Supply spike
Issuance of new municipal bonds in August was up 21 percent from the same month in 2015. It was also up 28 percent from its five-year average for the month, noted the BlackRock report.
While the increased eagerness to borrow may be due to the upcoming election and market suspicion about an upcoming interest-rate hike, it also may represent the beginning of an end of a multi-decade period of low government borrowing.