US state and local government debt is experiencing its weakest July in more than 20 years, a stark departure from the typical summer strength of the $4 trillion market. This downturn is attributed to a confluence of factors, primarily rising benchmark Treasury yields and a substantial increase in new municipal bond issuance.

Historically, July has been a favorable month for municipal bonds, often characterized by lower volatility and positive returns. However, this year's performance deviates sharply from that pattern. The upward pressure on Treasury yields, which are closely watched benchmarks for all fixed-income securities, has made newly issued and existing municipal bonds less attractive by comparison. Investors are demanding higher yields to compensate for the increased interest rate risk and the opportunity cost of holding lower-yielding municipal debt when Treasury yields are climbing.

Furthermore, a significant volume of new municipal debt has come to market, increasing the supply of bonds available. This surge in issuance, coupled with the general pressure from rising Treasury yields, has created headwinds for the muni market, pushing prices down and yields up, leading to the worst July performance since 2003.