Long-term muni yields hit 50 basis point rise

Municipal bond yields rose 10 to 15 basis points on Thursday. This move mirrored the increase in US Treasury yields. The asset class is tracking the broader rate environment. Long-dated muni yields have climbed more than 50 basis points since the end of June. These levels are the highest since the tariff-induced volatility in April 2025.

Market participants are pricing in a 70 percent chance of a Federal Reserve rate hike next week. Producer price data indicated rising inflation. Analysts suggest the 10-year US Treasury yield could exceed 5 percent. This level has not been seen since October 2023.

Treasury dynamics drive municipal moves

Munis usually follow US Treasuries. The Treasury market faces pressure from inflation concerns and federal deficit issues. Cooper Howard of Charles Schwab noted this is primarily a US Treasury story. Chad Farrington of DWS added that the Fed's stance is a key factor. The market is reacting to the potential shift in monetary policy.

Higher yields create buying opportunities for some investors. Adam Congdon of Payden & Rygel highlighted the value in 5 percent coupons. He suggested buying across the coupon spectrum is a strong trade. Mark-to-market losses are a secondary concern for long-term holders.

Heavy issuance strains secondary demand

New issuance surged to over 15 billion dollars this week. The largest deal was a 3.82 billion dollar issue from the Alabama Toll Road Authority. Chris Brigati of SWBC described a hangover effect from this heavy supply. The secondary market has been lackluster for weeks. Buyers are selling into weakness rather than providing support.

Elevated supply without matching demand will weigh on total returns. Inflation expectations and term premiums set a floor for yields. The Fed is likely to adopt a hiking bias. This dynamic limits the potential for yield declines in the near term.

Fund flows show mixed signals

Investors added 192.8 million dollars to municipal bond mutual funds last week. This followed 138.7 million dollars in inflows the prior week. High-yield funds saw outflows of 166.2 million dollars. This contrasts with 61.1 million dollars in inflows previously. The data comes from LSEG Lipper.

GN auto markets and bonds reported the details of the Alabama deal. Wells Fargo priced the 3.82 billion dollar issuance. The first tranche included 571.31 million dollars in first lien bonds. Yields ranged from 5.35 percent to 5.69 percent depending on the maturity. The second tranche involved 611.37 million dollars in enhanced third lien bonds.