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Municipal-bond week in review: Yields creep higher

NEW YORK, N.Y. – Yields for municipal bonds crept upward last week after an encouraging report on the job market drove Treasury yields higher.

Muni yields tend to move in the same direction as Treasurys, and the 10-year Treasury’s yield had its biggest gain since February after a report showed that employers hired more workers last month than economists expected.

The 10-year yield on the AP Municipal Bond index rose to 1.778 per cent Friday from 1.759 per cent a week earlier. It has been holding steady in a narrow range since mid-July, meandering between 1.75 per cent and 1.80 per cent. The 30-year yield rose to 2.346 per cent from 2.301 per cent.

Higher yields mean investors buying muni bonds today are getting a bit more in interest payments. But it also means that investors who already own them are seeing a dip in prices. That’s because a bond’s yield and its price move in opposite directions. The largest municipal-bond exchange-traded fund, iShares’ National Muni Bond ETF, slipped 0.5 per cent over the week.

Among other trends shaping the municipal market:

— Spotlight on Puerto Rico

As if Puerto Rico needed any more trouble. The island already failed to make a payment on its general-obligation bonds in July, the culmination of a decade of economic struggles and rising debt. Now, worries about the Zika virus could make things even more difficult.

Puerto Rico has had nearly 5,500 reported cases of Zika, according to the Centers for Disease Control and Prevention. That’s triple the number in the 50 U.S. states.

The spread of Zika will likely keep some tourists away from the island, and tourism has been one of the few industries to add workers there recently. It could also push more Puerto Rican residents to leave for the U.S. mainland, accelerating a yearslong migration. That would mean even fewer taxpayers for a government that needs more revenue.

Credit-rating agencies already rate Puerto Rico as below investment grade. The spike in Zika cases only puts further pressure downward on its credit strength, Moody’s vice-president Emily Raimes wrote in a recent report.

— Mind the gap

Municipal bonds that take longer to mature are riskier for investors to hold, but they’re paying more than they used to over their short-term rivals.

Municipal bonds maturing in 10 years are offering 1.16 percentage points more in yield than those maturing in two years, according to the AP Municipal Bond index. That gap has been steadily widening over the last month after being as narrow as 0.946 percentage points in the first week of July.