Muni week in review: Yields trend still trending higher

NEW YORK, N.Y. – Municipal bond yields rose modestly this week, continuing October’s upward trend. The 10-year yield on the AP Municipal Bond index was 2.076 per cent Friday at 5 p.m. Eastern time.

Muni yields usually move in the same direction as Treasury yields, which have also been rising in recent weeks. The 10-year Treasury note reversed course and dropped this past week. Muni yields, however, held fairly steady: While Friday’s level reflected a small drop from its high of 2.082 per cent on Wednesday and Thursday, it was still up from last Friday’s 2.030 per cent.

Bond prices move inversely to yields. So while investors buying muni bonds for interest income have likely welcomed the recent rise in yields, those that already hold them have seen prices fall. The largest municipal-bond exchange-traded fund, iShares’ National Muni Bond ETF, has lost 0.9 per cent in October. It returned 0.1 per cent this past week.

In other muni bond news:

__The gap grows bigger.

Long-term bonds carry the risk that future interest rate increases could cause their prices to fall. That’s why they’re considered riskier, and offer higher yields, than short-term bonds. The spread, or gap, between two- and 10-year muni bonds has been widening in recent weeks, hitting 1.147 per cent Friday. Spreads haven’t been this wide since mid-August.

— Supply surge.

Local governments and other municipal borrowers issued $35.7 billion in muni bonds last month, the largest September issuance on record, according to a recent report from asset manager BlackRock. According to the report, September supply was up 51 per cent versus 2015 and 35 per cent above the five-year average. It also followed a record-setting August issuance.

The strong supply most likely reflects issuers’ desire to complete deals ahead of the election. Borrowers are also concerned about a potential rate hike by the Federal Reserve in December. Meanwhile, BlackRock noted, investor demand for munis has been a bit lower than in previous months, likely due to weaker performance for muni funds.