Muni bond sell-off persists amid worries about insurers

News of a possible rescue of ailing bond insurance giant Ambac Financial Group came too late Friday to stave off another sell-off in municipal bonds.

The tax-free annualized yield on a Bloomberg News index of 20-year California general obligation bonds jumped to the highest since June 2004, reaching 5.05% compared with 5% on Thursday and 4.84% a week earlier.

The yield on the Bond Buyer index of 40 muni securities nationwide rose to 5.01%, up from 4.98% on Thursday and the highest since August.

Munis have been hurt, in part, by fears that bond insurers, which insure about half the muni market, might lose their AAA credit ratings because of losses they face on mortgage bonds they’ve backed.

What’s more, nervous investors have pulled back from the so-called auction-rate bond market, which is used by many municipalities to borrow via floating-rate securities. California and other issuers have said they would stop using that market and shift borrowing to conventional bonds.

As some investors have dumped munis in recent weeks, share prices of many muni bond mutual funds have fallen. The Franklin California Tax-Free fund slid to $7.09 a share Friday, a six-month low. It has fallen 1.9% in two weeks.