A sell-off in US Treasuries, coupled with a supply surge, put pressure on long-term municipal bond yields, pushing them to their highest level since 2011.

A sell-off in US Treasuries, coupled with a supply surge, put pressure on long-term municipal bond yields, pushing them to their highest level since 2011.

The U.S. municipal bond market is experiencing a significant sell-off.

As U.S. Treasury yields continued to rise and U.S. state and local government bond issuance surged, municipal bond yields climbed sharply on Thursday, with the yield on the longest-term 30-year municipal bond rising to its highest level in 15 years, indicating that pressure in the bond market is spreading further from the U.S. Treasury market to the local government financing market.

According to Bloomberg data, at 3 p.m. ET on Thursday, the yield on the 30-year benchmark municipal bond rose 14 basis points to 4.89%, a new high since February 2011 and the largest single-day increase since April 2025; the yield on the 10-year benchmark municipal bond rose as much as 15 basis points to 3.69%, a new high since April 2025.

Shannon Rinehart, co-head of municipal bond investments at Columbia Threadneedle Investments, said there is currently “nervousness” in the market, with investors seeing more attractive entry levels for municipal bond yields while worrying that yields may rise further in the future.

US Treasury yields surged, putting pressure on sentiment in the municipal bond market.

The sharp drop in municipal bonds was primarily driven by the volatility in the US Treasury market. On Thursday, US Treasuries continued to be sold off, with the 10-year Treasury yield rising as much as 12 basis points to approximately 4.96%, a new high since October 2023.

The Ministry of Finance had previously increased its long-term bond repurchase operations, and on Thursday officially implemented the first increased long-term bond repurchase operation, exceeding $5 billion but below the upper limit of $6 billion, and far exceeding the previous upper limit of $2 billion. However, this failed to calm the bond market. Investors remain cautious about the effectiveness of the Ministry of Finance's measures in stabilizing long-term yields.

Meanwhile, the municipal bond market itself is facing a surge in issuance. On Thursday, the Alabama Toll Roads, Bridges and Tunnels Authority issued approximately $3.8 billion in bonds to fund the construction of a new bridge across the Mobile River; the New York City Transit System issued approximately $778 million in bonds; and New York City also issued approximately $1.6 billion in general liability bonds on Wednesday.

In a report, JPMorgan analysts Peter DeGroot et al. pointed out that factors such as rising US Treasury yields, increased municipal bond issuance, reduced reinvestment funds, and tax-related transactions have collectively put "significant pressure" on the municipal bond market.

Capital outflows intensified, with the municipal bond index falling 1% in September.

Demand also showed signs of weakening. JPMorgan data showed that investors withdrew approximately $460 million from municipal bond funds on Wednesday, the largest single-day net outflow since April 2025.

The Bloomberg Municipal Bond Index fell about 0.5% on Wednesday, bringing its cumulative decline for September to about 1%. For the municipal bond market, which is generally considered relatively stable and has tax advantages, the simultaneous rise in yields and capital outflows indicates that the current pressure is no longer simply due to fluctuations in the US Treasury market, but is driven by multiple factors including interest rates, supply, and demand for funds.

With long-term US Treasury yields continuing to approach 5% and rising oil prices reinforcing inflation concerns, the ability of the municipal bond market to absorb the continued increase in new bond supply will be the next major variable for investors.

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