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U.S. municipal-bond yields surged for a second day to the highest in more than three months after the Federal Reserve raised its assessment of the economy.
The yield on top-rated tax-exempt bonds due in 10 years rose 7 basis points to 2.2 percent at 4:02 p.m. in New York, the highest since Nov. 29, according to a Bloomberg Valuation Index. The 30-year (BVMB30Y) tax-exempt yield jumped 8 basis points, the most since Jan. 24, to 3.46 percent. A basis point is 0.01 percentage point.
Treasury yields are at their highest since October after Fed policy makers said March 13 that the labor market is improving and strains in financial markets have eased. They repeated that interest rates will probably stay low at least through late 2014.
“Any time you get massive Treasury moves like yesterday, munis are going to take a couple days to fall” in price, Hardy Manges, head of municipal trading at Mitsubishi UFJ Securities in New York, said in a telephone interview. Yields move in the opposite direction of prices.
Ten-year Treasury yields surged 14 basis points yesterday to 2.27 percent, the highest since Oct. 28. The seven-day rise in yields is the longest streak since the nine days ended June 26, 2006. The yield rose 1 basis point at 4:59 p.m.
Further signs of economic strengthen came today as applications for unemployment insurance fell by 14,000 to 351,000 in the period ended March 10, the Labor Department said. The Bloomberg Consumer Comfort Index improved to minus 33.7 from minus 36.7 in the week ended March 11.
Companies have slowed the pace of firings and are expanding their workforces as sales rise and the threat of financial contagion from a European default diminishes. Job growth in February capped the best six months since 2006, and the unemployment rate stayed at 8.3 percent, a three-year low.
Municipal rates have lagged behind the jump in yields on federal bonds. The 10-year benchmark tax-exempt yield was 96.5 percent of the interest rate on similar-maturity Treasuries, less than the one-year average of 97.8 percent, Bloomberg data show.
Investors use the ratio as a gauge of relative value: a lower ratio means munis are more expensive relative to Treasuries.
Municipal bonds have returned 0.8 percent this month through yesterday, according to Bank of America Merrill Lynch indexes tracking prices and coupon payments, putting them on track for their worst month since January 2011, when they lost 1 percent. Munis returned 11.2 percent in 2011, beating Treasuries, corporate debt, commodities and stocks.
Declines in muni bonds “will slow today, and my guess is by tomorrow they’ll stop dropping,” Manges said. “Substantially higher yields just in the last two weeks are going to interest some different sets of buyers.”
The amount of local-government debt scheduled for sale in the next 30 days is down 32 percent from the 2012 high of $11.4 billion on Feb. 28, according to data compiled by Bloomberg.
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