Muni Bonds Hit ‘Excruciating Richness’ With Valuations at Record

The dizzying price run-ups that have raced through corners of the financial markets have seeped into an unlikely place: American municipal bonds.

With billions of dollars of cash flowing into mutual funds each week, a key index of the yields on state and local government debt has tumbled to 0.9%, the lowest in at least four decades.

The payouts on benchmark tax-exempt bonds are at record lows against Treasuries, signaling that the closely watched gauge of valuations is at an time high. Even some of the lowest-rated borrowers are able to raise funds at rates once reserved for the most ...