Long-term muni yields on the rise

Long-term municipal bond yields are heading up again.

Yields on the tax-free securities rose Thursday to their highest since March 4, as a heavy supply of new securities tested investor demand.

The California Department of Water Resources sold $1 billion of tax-free revenue bonds backed by electric-power fees to refinance so-called auction-rate and variable-rate debt.

The Triborough Bridge and Tunnel Authority of New York also sold $1 billion in debt.

The annualized yield on a Bond Buyer index of 40 long-term muni issues rose to 5.19%, up from 5.17% on Wednesday and 5.08% a week ago.

Muni yields had soared in February as a flood of selling hit the market and investors retreated. The selling stemmed in part from the worsening U.S. credit crunch, as some hedge funds and other investors that had bought muni bonds with borrowed money had their loans called in.

Also, investors became skittish about auction-rate and variable-rate muni securities, which are long-term bonds that reset their interest rates weekly or monthly.

But after the Bond Buyer index yield reached a six-year high of 5.42% on Feb. 29, buyers rushed into the muni market in the first week of March.

Some analysts expect the supply of new bonds to remain heavy this spring as municipalities that are paying high “penalty” rates on now-unwanted auction-rate debt seek to refinance those bonds.

The California revenue bonds sold Thursday mature in 2017, 2018, 2021 and 2022. Yield ranged from 3.79% to 4.65%. Individual investors bought $152 million of the deal, the state said.