Sell-off sweeps through U.S. municipal bonds: single-day trading volume hits highest since at least 1995, yields surge to peak since 2011.

A sell-off sweeping through the U.S. municipal bond market drove state and local government debt to its busiest single-day trading record in more than three decades. About 117,419 municipal bond trades were recorded Monday, the highest number of transactions since at least 1995, according to reports to the Municipal Securities Rulemaking Board. Trading volume by par value also rose, though it has yet to reach a historical record. Some $21.8 billion in municipal bonds traded Monday, MSRB data show, lower than several sessions earlier this month but above the roughly $14.6 billion one-year average. The surge in trading comes as investors grapple with inflation fears exacerbated by the ongoing U.S.-Iran conflict and fears of a hawkish turn by the Federal Reserve, triggering a broad bond-market sell-off. Benchmark municipal yields climbed again Tuesday, rising by as much as 3 basis points at one point. Andrew Clinton, chief executive officer of Clinton Investment Management, said elevated absolute yields have attracted new buyers, sharp swings in interest rates have created tax-loss harvesting opportunities, and some investors have been unsettled by the sell-off all factors that together fueled the surge in municipal bond trading. "All those things came together for more volume," he said. "And until yesterday, the new-issue calendar was pretty heavy and strong, so there was a lot of trading going on, with people selling other bonds they own to make room for the new bonds they're buying." Municipal bond prices continued to fall, pushing benchmark yields to the highest level since at least 2011. The market is on track for its worst monthly performance since 1987, down 4.7% so far this month. Ben Barber, head of municipal bonds at Franklin Templeton, said munis have held up fairly well given all the factors working against the asset class. Supply has exceeded $51 billion this month, the highest for a September since 2020, according to compiled data. "Munis have clearly underperformed Treasuries, there's no question about that, but given how strong primary market flows have been and historically high bid-to-cover activity, performance hasn't been as bad as one might think," he said. "So we'd characterize the overall trading environment as relatively orderly."