Rising interest rates are threatening the municipal-bond boom on Wall Street, leaving governments less willing to borrow and households less willing to invest in the $4 trillion market, the Wall Street Journal reported. Bond issuance by state and local governments dropped 8% in the first quarter from a year earlier, with public officials calling off refinancings and spending down stimulus cash. At the same time, spooked investors yanked their money from municipal-bond funds, which suffered their biggest quarterly outflows since 2013. States and cities have been forced to cut prices to sell their bonds to banks and insurance companies because muni bond funds are no longer offering top dollar, dealers said. Bonds from corporates to Treasurys suffered their worst start to the year in decades, ahead of Federal Reserve moves to rein in inflation. After increasing interest rates by a quarter-percentage-point last month, the central bank could raise rates by a half-percentage point in May and begin reducing its $9 trillion asset portfolio, the Fed’s latest policy-meeting minutes suggest. Benchmark yields on triple-A, 10-year, tax-exempt general-obligation muni bonds were 2.34% on Friday, compared with 1.03% a year earlier, according to Refinitiv Municipal Market Data. Municipalities borrowed a combined total of about $97 billion in the first quarter, slipping below $100 billion for the first time since early 2020. Refinancing activity fell by nearly half, to $21 billion. For the past two years, state and local governments have executed about $40 billion in refinancing deals in the first quarter, as public officials took advantage of low rates and put off debt payments to manage a COVID-19 budget squeeze.
