There’s a whole lot of change going on in the bond market. Since the midterm Congressional election, and since the Federal Reserve announced its plans to print our way out of the fiscal doldrums, bond yields have been on a decided path higher. Moreover, there’s been a big drop in the value of municipal bonds.

Rising long-term interest rates, i.e., rising bond yields, is definitely a theme that has come into its own. Now that the Fed has made the decision to implement quantitative easing part II, or QE2, with the purchase of $600 billion in longer-term Treasury bonds at the rate of $75 billion per month for the next eight months, yields are on the rise. But the Fed’s quantitative easing isn’t the only reason for the changing bond landscape. (I will return to discussing QE2 shortly).

Consider for a moment all of the borrowing that will have to take place by countries around the world, and you just have to surmise that interest rates are bound to continue climbing. According to estimates from the International Monetary Fund (IMF), the amount of money that advanced-nation governments will need to borrow next year is staggering.

In just 2011 alone, new borrowing around the globe will be a mind-blowing $10.2 trillion. These are debt levels unseen since the aftermath of World War II. Next year, the U.S. government will have to borrow $4.2 trillion, according to the IMF. With so much borrowing needed, interest rates are going to take off.

Another big part of the changes afoot in bond land is the recent plunge in municipal bond prices. To give you a sense of just how big the selling has been in the municipal bond sector, take a look at the chart below of the SPDR Nuveen Barclays Capital Muni Bond Fund (TFI).

As you can see, the fund plunged through both the short-term, 50-day moving average and the long-term, 200-day moving average in a matter of weeks. So, why has the muni bond segment tanked?

The answer to this question has multiple facets. In fact, it’s the convergence of several trends that’s brought big trouble to muni land. First, we have those rising long-term Treasury bond yields which drive up interest rates in general. The chart below of the 30-Year T-Bond Yield ($TYX) clearly shows the trend toward rising rates. As you can see, 30-Year T-Bond yields recently spiked above their short- and long-term moving averages, almost in diametrically opposed fashion to the price action we see in TFI.

Besides the overall spike in interest rates, munis are confronting a glut of new bonds flooding the market. My home state of California is on the verge of conducting a bond sale amounting to some $14 billion. This comes as the state’s budget wallows in red ink. And it’s not just California that’s in trouble. The recession has caused many counties and municipalities around the country to suffer fiscal hardships and, as such, investors are more and more reluctant to either buy new muni bonds, or to hold onto the ones they already own.

Finally, there’s some real uncertainty about whether Congress will extend what’s called the “Build America Bond” program, which for two years has allowed states and municipalities to issue taxable debt subsidized by Uncle Sam. This program has reduced the supply of conventional tax-free muni bonds, helping to keep yields low. If, however, the program isn’t extended beyond its Dec. 31 expiration, bond issuers would be forced to ramp up borrowing in the tax-free market in 2011, and that also has the potential of creating more supply problems.

If you own municipal bonds here, I suggest that you consider moving your money to safer ground. The last thing your portfolio can afford is to get sucked down into a vortex of muni-bond value destruction.