AAA Municipal Bond vs. U.S. Treasury & Corporate Bonds

Posted on by riegerreport

Municipal Bond Market: Key Takeaways

Nominal yields:

  • Post QE: muni nominal yields now appear rich relative to short term historical pattern. Nominal yields for 20 year and longer AAA municipal bonds are equal to or are modestly higher than U.S. Treasury bond yields. (Pre QE the muni to treasury yield ratio was in the 80% – 85% range)

Taxable equivalent yields:

  • In the 0 – 10 year range most Taxable Equivalent Yields (TEY) for AAA municipal bonds still show value for most tax brackets.
  • On the longer end of the curve, AAA munis and their TEYs show value for the higher tax brackets(37% and 35%) as those brackets tend to benefit most from the tax exempt interest.
  • Munis v. high quality corporate bonds, such as Apple Inc., AAA muni Taxable Equivalent Yields for the higher tax brackets are competitive. At lower tax brackets, Apple Inc. bond yields remain relatively favorable in comparison to AAA municipal bonds yields.

Bond ETFs:

  • The larger investment grade municipal bond ETFs tend to have shorter duration than investment grade corporate bond ETFs and TEYs that are comparable when using the highest tax bracket (37%).

061518_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph1

Data as of 6/15/2018

Sources: The Bond Buyer www.bondbuyer.com Data Workstation, MBIS Municipal Yield Curves, U.S. Department of the Treasury www.treasury.gov. Chart is provided for illustrative purposes only. TEY = Taxable Equivalent Yield.

061518_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph2

Data as of 6/15/2018

Sources: Apple Inc. bond yields provided by SQX https://sqx.com/. Municipal data sourced from the Bond Buyer Data Workstation www.bondbuyer.com and MBIS Municipal Yield Curves. U.S. Treasury bond yields sourced from U.S. Department of the Treasury www.treasury.gov. Chart is provided for illustrative purposes only. TEY = Taxable Equivalent Yield.

061518_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph3

Data as of 6/15/2018

Sources: Apple Inc. bond yields provided by SQX https://sqx.com/. Municipal data sourced from the Bond Buyer Data Workstation www.bondbuyer.com and MBIS Municipal Yield Curves. U.S. Treasury bond yields sourced from U.S. Department of the Treasury www.treasury.gov. Chart is provided for illustrative purposes only. TEY = Taxable Equivalent Yield.

Bond Exchange Traded Funds (a sampling)

The Larger Investment Grade Municipal Bond ETFs:

  • Tend to have shorter durations than larger investment grade corporate bond ETFs. This is a natural reflectiong of the investment grade municipal bond market – which is currently tracking approximately 2.5 years shorter in duration to corporate bonds.
  • Have comparable Taxable Equivalent Yields (TEYs) relative to investment grade corporate bond ETFs. (When using the highest tax bracket (37%) in the calculation).

Note: Not all municipal and corporate bond ETFs selected for the example table on page 7.

Data as of 6/15/2018.

Sources: VanEck www.vaneck.com, iShares by BlackRock www.ishares.com, The Vanguard Group www.vanguard.com. Table is provided for illustrative purposes only. Past performance is not a guarantee of future returns. TEY = Taxable Equivalent Yield calculated at an assumed 37% tax rate.

I.G. Municipal Bond ETFs v. I. G. Corporate Bond ETFs

061518_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph4

Data as of 6/15/2018

Sources: VanEck www.vaneck.com, iShares by BlackRock www.ishares.com, The Vanguard Group www.vanguard.com. Table is provided for illustrative purposes only. Past performance is not a guarantee of future returns. TEY = Taxable Equivalent Yield calculated at an assumed 37% tax rate.

Sources Used in this Report:

Notes:

  • Taxable Equivalent Yield = Tax Exempt Yield / (1 – Federal Tax Rate)
  • 2018 tax brackets, however not all tax brackets are represented herein.
  • End of day yields are used.
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