December 6, 2017 / 9:19 PM / a year ago

U.S. municipal bond yields drop amid supply surge

(Reuters) - U.S. municipal bond prices soared for a fifth straight session on Wednesday, sending the 30-year yield to a 14-month low on the market’s benchmark scale as investors gobbled up a huge surge in supply.

Yields have been sinking despite a more than $20 billion burst in supply this week spurred by federal tax changes pending in the U.S. Congress that could eliminate federal tax breaks for private activity and advance refunding bonds starting in 2018.

The 30-year bond yield on Municipal Market Data’s triple-A scale reached its lowest level since Oct. 7, 2016, tumbling 12 basis points to 2.46 percent. The yield on 10-year bonds dropped 11 basis points to 1.88 percent.

While the prospect of building supply weighed on prices and pushed yields higher during the last two weeks of November, the market reversed direction late last week.

“There continues to be demand. It’s definitely gone beyond anyone’s expectations,” said Dan Solender, lead tax-free fixed-income portfolio manager at Lord Abbett.

Barry HoAire, co-head of fixed income at Bel Air Investment Advisors, said investors are looking to ease their tax burden by parking money in tax-free munis ahead of other provisions in the U.S. House and Senate bills that would eliminate or cap deductions for state and local taxes paid.

Investors are also worried that supply will dry up in January, a big month for reinvestment cash from muni coupon payments and bond redemptions, he added.

“People think that all the deals that are being pulled forward in December will make for a light first quarter (supply),” he said.

Differences between the House and Senate tax bills will be thrashed out in a conference committee with the aim of sending a compromise bill to President Donald Trump by yearend.

Reporting By Karen Pierog in Chicago; Editing by Daniel Bases and Diane Craft

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