Munis Suffer Worst Week Since March 2020 as Supply Wave Weighs

(Bloomberg) -- The $4 trillion municipal bond market is wrapping up its worst week since early 2020 as an onslaught of issuance weighs on the debt of US states and cities.

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Yields on 10-year state and local-government debt have jumped 34 basis points this week, to 2.99% on Friday, for the steepest weekly climb since March 2020, when the onset of the pandemic roiled financial markets, according to data compiled by Bloomberg.

The trigger, investors say, has been a burst of supply. Borrowers have issued more than $180 billion in long-term municipal bonds this year, making the first five months of 2024 the busiest start to a year in more than a decade by volume, data compiled by Bloomberg show. Issuers trying to get ahead of the November US presidential election and potential changes in tax policy are driving the sales.

“We have gone through a sustained period of heavy supply,” said Chris Brigati, director of strategic planning at SWBC. “We were due for a correction.”

Some investors may also be wary of what direction the Federal Reserve may take this year, with inflation proving sticky and questions swirling around whether officials will lower interest rates.

A potential silver lining from the selloff is that muni yields have surged to the highest since November relative to those on Treasuries, which may lure money in as investors get cash back in the coming months from maturing debt.

Pat Luby, municipal strategist at CreditSights Inc., said he expects the buyers’ market to continue, with “enormous” flows of principal in June, July and August thanks to maturities and called bonds.

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