Municipal-bond week in review: Yields climb again
Municipal bond yields hit fresh highs again this week, continuing their strong climb since the U.S. presidential election.
According to the AP Municipal Bond index, the 10-year muni yield was 2.810 percent as of 5 p.m. Eastern time Friday. Just a month earlier, it was 2.051 percent.
Yields on two- and 30-year muni bonds have also risen dramatically over the past month. As of Friday, the two-year yield was 1.390 percent. It was under 0.6 percent in mid-August. The 30-year yield finished the week at 3.566 percent.
Yields have jumped across the bond market since last month's election on expectations that the Trump administration's efforts to jumpstart the economy will cause interest rates to increase faster than expected. Higher interest rates and inflation would hurt the price of bonds.
A solid jobs report on Friday bolstered that view and makes it all but certain that the Federal Reserve will raise short-term interest rates later this month.
Higher yields boost interest payments for investors buying muni bonds today, but they also means lower prices for bonds that investors are already holding. That's because bond yields and prices move in opposite directions. The rise in yields caused the largest municipal bond exchange-traded fund, the iShares National Muni Bond ETF, to lose 4.1 percent last month. That's its worst monthly loss since 2008.
Also hurting muni bond prices are expectations that the Trump administration may seek to lower tax rates. That would dull one of the biggest appeals of municipal bonds: their tax-exempt income.
In other muni bond news:
— A greater gap
Longer-term bonds are more sensitive to changes in interest rates than their short-term rivals. So with all the uncertainty surrounding rates, investors are demanding a greater premium to hold these riskier bonds.
As of Friday afternoon, muni bonds that take 10 years to mature yielded 1.42 percentage points more than two-year munis, according to the AP Municipal Bond Index. And those that dared to hold 30-year bonds reaped 2.176 percentage points more in yield than two-year bondholders.
— Taper tantrum part two?
Investors yanked more than $7 billion out of municipal bond funds and ETFs in the weeks following the election, according to research firm ICI. That marks a sharp change from a long winning streak for the group, which had seen 53 straight weeks of inflows through mid-October.
In the week ending Nov. 16th alone, investors pulled out over $4.5 billion from muni funds. That's the biggest weekly outflow since the "taper tantrum" of 2013, when bond investors rushed to sell after the Fed's chairman hinted that the U.S. may wind down its bond-buying program.
The taper tantrum lasted over six months, during which investors pulled more than $40 billion from municipal bond funds.