The U.S. municipal bond market is currently experiencing a pronounced selloff.

As Treasury yields continue their upward trajectory and issuance from state and local governments swells, municipal bond yields climbed sharply on Thursday. The benchmark 30-year municipal bond yield reached its highest level in fifteen years, indicating that pressure in the fixed-income market is spreading beyond Treasuries into the local government financing sector.

According to data, the 30-year benchmark municipal bond yield rose 14 basis points to 4.89% by 3:00 PM ET on Thursday, marking its highest point since February 2011 and its largest single-day increase since April 2025. Meanwhile, the 10-year benchmark municipal bond yield climbed 15 basis points to 3.69%, reaching a new high not seen since April 2025.

Shannon Rinehart, co-head of municipal bond investments at Columbia Threadneedle Investments, noted that "anxious sentiment" prevails in the market. Investors are weighing the more attractive entry levels offered by current municipal bond yields against concerns that yields could push even higher in the future.

Soaring Treasury Yields Weigh on Municipal Bond Sentiment

The sharp decline in municipal bonds was primarily triggered by the volatile moves in the U.S. Treasury market. On Thursday, Treasuries continued to face selling pressure, with the 10-year yield rising 12 basis points to approximately 4.96%, the highest level since October 2023.

The Treasury Department had previously escalated its long-dated bond buyback program, executing its first expanded operation on Thursday. The operation, which totaled over $5 billion, fell short of the $6 billion upper limit target but far exceeded the previous $2 billion cap, yet still failed to reassure the bond market. Investors remain cautious about whether these measures can effectively stabilize long-end yields.

Adding to the strain, the municipal market is contending with a surge in supply. On Thursday, the Alabama Toll Road, Bridge and Tunnel Authority issued approximately $3.8 billion in bonds to finance a new bridge spanning the Mobile River. New York City's transit system also sold around $778 million in bonds, following the city's issuance of roughly $1.6 billion in general obligation bonds on Wednesday.

Analysts at JPMorgan, including Peter DeGroot, highlighted in a report that a combination of rising Treasury yields, increased municipal bond issuance, reduced reinvestment capital, and tax-related trading activity is collectively creating "significant pressure" on the municipal bond market.

Outflows Accelerate as Municipal Bond Index Falls 1% in September

Signs of weakening demand are also emerging. According to JPMorgan data, investors withdrew approximately $460 million from municipal bond funds on Wednesday, marking the largest single-day net outflow since April 2025.

The Bloomberg Municipal Bond Index fell about 0.5% on Wednesday, bringing its cumulative decline for September to roughly 1%. For a market typically viewed as relatively stable and offering tax advantages, the simultaneous surge in yields and capital outflows signals that current pressures are no longer merely a reflection of Treasury market volatility. Instead, they are being driven by a confluence of interest rates, supply dynamics, and shifting capital demand.

With long-end Treasury yields approaching 5% and rising oil prices rekindling inflation concerns, whether the municipal bond market can absorb the steadily increasing wave of new issuance ahead will be the next major variable for investors to monitor.