(Bloomberg) -- Municipal bonds are plunging the most in weeks after Federal Reserve Chair Jerome Powell took a more cautious view on interest-rate cuts in 2025, stunning investors and leading to a global bond-market rout.
Benchmark, top-rated state and local government bond yields rose as much as 19 basis points on Thursday, in a rout that threatens to pare back the 1.56% gain for municipal debt so far this year.
“This could make or break a lot of people’s years as far as total returns,” said Eric Kazatsky, senior US municipals strategist for Bloomberg Intelligence. “If rates meaningfully spike higher, sure you could actually end up in the red when it comes to returns for the year,”
The largest decline came in the middle of the curve with yields 14-year securities increasing 19 basis points and those on the longest-dated securities rising 15 basis points to 3.83%, according to data compiled by Bloomberg. Ten-year municipal bond yields have climbed for nine straight days, the longest stretch since May, the data shows.
The US economy is still powering ahead despite expectations among forecasters for an eventual slowdown. Gross domestic product increased at a 3.1% annualized rate in the July-to-September period, more than what was estimated, according to figures released Thursday by the Bureau of Economic Analysis. That followed Wednesday’s Fed call that rate cuts will hinge on further progress cooling inflation.
“Any time you get an adjustment at this point in the calendar year, the volatility is going to be exaggerated,” said Patrick Luby, a municipal strategist at Creditsights Inc. “Traders are not going to be anxious to take on incremental risk for bonds they’re not going to be able to sell for two weeks.”
The selloff is unlikely to impact many new bond sales in the primary market, as much of the issuance from state and local government has subsided ahead of the December holidays. Just $1.7 billion of sales are scheduled over the next 30 days, compared to the 12-month average of $11.2 billion, according to data compiled by Bloomberg.
Given the holidays, sales are light and trading desks are less active. “It could be argued there are fewer eyeballs looking to deploy capital at a time when accounts may already be positioned the way they’d like heading into year end,” said Gabe Diederich, senior vice president and portfolio manager at Baird Asset Management.
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