An exodus from the municipal market helped trigger the yield increase. Individuals have pulled $60.7 billion from muni mutual funds this year, the most since at least 1992, when Lipper US Fund Flows data begin.
The current streak of 31 straight weekly outflows began in May as investors speculated that a stronger economy would lead the Fed to curb its bond buying, a decision it announced last week.
“For the first five months, the municipal market was operating by the playbook for an environment where rates were sideways,” said David Dowden, who helps oversee $7.5 billion of local debt at MacKay Municipal Managers from Princeton, New Jersey. “In June that all changed, and what we saw was a liquidity squeeze that was specific to the muni market and led to its underperformance.”
Yield Surge
The Fed bond buying helped push yields on 20-year general- obligation bonds to 3.27 percent a year ago, the lowest since the 1960s, according to a Bond Buyer index.
The interest rate has increased to 4.73 percent, eclipsing the 10-year average of 4.41 percent.
“I’m not saying we’re cheap, but last year we were so overvalued that we saw the selloff this year,” Ryon said. “Now we’re more fairly valued.”
Tom Weyl, director of muni research at Barclays Plc, and Michael Zezas, chief muni strategist at Morgan Stanley, predict another year of negative returns in 2014. The securities have dropped 2.9 percent this year without factoring in volatility, Bank of America data show.
Local-government debt hasn’t declined in back-to-back years since the 1980s, according to Barclays data.
The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns aren’t annualized. Higher volatility means an asset’s price can fluctuate more in a short period, increasing the prospect for unexpected losses.