Municipal bonds extended their selloff Tuesday, with benchmark yields rising as much as eight basis points as Middle East tensions and surging oil prices roiled US Treasuries for a second day. Ten-year muni yields climbed seven basis points to 2.59% as of 2 p.m. in New York, heading for the biggest gain since July, according to Bloomberg data.

Climbing oil prices prompted traders to scale back expectations for Federal Reserve rate cuts this year, triggering a broader Treasury selloff. Kevin McGuigan, senior municipal market analyst at Municipal Market Analytics, noted that the bond market is increasingly focused on inflation risks stemming from Middle East instability. He emphasized that municipals remain well-positioned for economic slowdowns due to solid state and local reserves and strong budget balances.

The market turmoil raised concerns about new deal demand if pressure persists. Lyle Fitterer of Baird's municipal sector said buyers will want to see Treasury market stabilization before committing to new issues unless pricing reflects current Treasury weakness. JPMorgan strategists expect the municipal market to establish clearing levels this week alongside greater certainty in Treasury rates, noting that municipal investors should remain well-funded given March 1st reinvestment and early month inflows.