The specter of higher interest rates have spooked bond investors, as nearly all January gains have been wiped out in February, The Wall Street Journal reported.

State and local government bonds suffered their worst year in decades in 2022, as newly issued higher-interest debt makes outstanding lower-interest bonds less attractive.

Investors’ and traders’ efforts to try to predict the Federal Reserve’s moves have resulted in debt that matures in one year trading at higher interest rates than debt that matures in three years, over the last two-month period, according to ICE Data Services. Market professionals told the Journal that they can’t remember that happening for such a prolonged period in more than a decade.

An inverted yield curve, which can be seen as a sign of an impending slowdown when it appears in the Treasury market, can be a sign of confusion in the muni market, where short-term securities are prized for their tax-exempt income, Municipal Market Analytics partner Matt Fabian told The Journal.

“All this volatility has bent the muni market a little bit,” Fabian said.

The congressional debate over the debt limit and its accompanying prospect of default do not help matters.

“We’re seeing the debt ceiling debacle shake muni markets,” Amanda Hindlian, president of fixed income and data services at ICE, said this week. Republicans’ demands for any increase in the debt limit to be offset by spending cuts could reduce federal funding for state and local governments.

Though these governments’ budgets are being strained by rising interest rates, higher costs for goods and services, and a potential economic slowdown, those strains are eased by federal pandemic-related stimulus and tax revenues. Fitch Ratings rates the outlook for most state and local government bonds to be stable going into 2023.