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Munis Retreat From Record Highs in Worst Week Since April

Nic Querolo
·1 min read

(Bloomberg) -- U.S. state and local-government bonds are headed for their biggest weekly drop in 10 months, stepping back from record high valuations amid speculation that President Joe Biden’s stimulus plans will stoke the pace of economic growth.

The yields on benchmark 10-year tax-exempt debt jumped 18 basis points over the past week to 0.85%, outstripping the 14 basis-point rise in Treasuries. That caused a closely watched gauge -- the ratio of muni yields to Treasuries -- to edge up from the lowest level in at least two decades, signaling that tax-exempt bond valuations have cheapened.

The jump in yields, the bulk of which came over the past two days, marks a slight retreat for a market that’s been held aloft by investors pouring billions of dollars into mutual funds just as the pace of new debt sales slows. The mismatch had helped keep tax-exempt bond yields holding near the lowest in more than six decades.

Related Story: Tax Advantage on Muni Bonds Disappears as Prices Hit Record High

“While it remains to be seen if the adjustment will be minor or a bigger move, an overall defensive portfolio stance is warranted,” Barclays Plc muni strategists led by Mikhail Foux, wrote in a research note Friday. “At current ratios, we find much more value in high-quality taxables than in tax-exempts.”

(Updates yields in second paragraph.)

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