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

Municipal Bond Market: Key Takeaways

AAA & AA Tax Exempt Nominal Yields:

  • Munis appear rich across the curve relative to high quality corporate bonds such as Apple Inc.
  • Munis appear attractive relative to the S&P 500 Dividend Yield (current indicated yield) from 3 year maturity range and longer.
  • Munis are rich relative to U.S. Treasury bond yields in the 0 – 10 year range and become attractive again at the 20 year maturity range and longer.

Taxable Equivalent Yields:

  • In the 0 – 5 year range Taxable Equivalent Yields (TEY) for most tax brackets show AAA municipal bonds also still are rich relative U.S. Treasury bond yields.
  • Out longer, i.e. the 10 year and longer range, Taxable Equivalent Yields for most tax brackets show munis are of value relative to U.S. Treasury bonds.
  • When comparing munis to 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 bond Taxable Equivalent Yields.

Bond ETFs:

  • The larger municipal bond ETFs indicate a value from a Taxable Equivalent Yield perspective relative to the taxable yield of large corporate bond ETFs given the shorter duration and higher quality of the municipal bond ETFs in general.

062218_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph1

Data as of 6/22/2018

Note: Nominal long end AAA muni yields at parity to US Treasury and well above S&P 500 Dividend Yield but only 76% of Apple Inc. corporate bond yields.

Sources: Apple Inc. bond yields provided by SQX https://sqx.com/. Municipal bond yields sourced from the Bond Buyer www.bondbuyer.com Data Workstation and MBIS www.mbis.com, U.S. Treasury yields sourced from the U.S. Department of the Treasury www.treasury.gov and the S&P 500 Dividend Yield was sourced from S&P Dow Jones Indices www.spdji.com. Chart is provided for illustrative purposes only.

062218_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph2

Data as of 6/22/2018

Sources: Apple Inc. bond yields provided by SQX https://sqx.com/ . Municipal bond yields sourced from the Bond Buyer www.bondbuyer.com Data Workstation and MBIS www.mbis.com, U.S. Treasury yields sourced from the U.S. Department of the Treasury www.treasury.gov and the S&P 500 Dividend Yield was sourced from S&P Dow Jones Indices www.spdji.com. Chart is provided for illustrative purposes only.

062218_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph3

Data as of 6/22/2018

Sources: Municipal bond yields sourced from The Bond Buyer www.bondbuyer.com Data Workstation and MBIS www.mbis.com, U.S. Treasury bond yields sourced from the U.S. Department of the Treasury www.treasury.gov and the S&P 500 Dividend Yield was sourced from S&P Dow Jones Indices www.spdji.com. Chart is provided for illustrative purposes only.

062218_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph4

Data as of 6/22/2018

Sources: Municipal bond yields sourced from the Bond Buyer Data Workstation www.bondbuyer.com and MBIS Municipal Yield Curves, U.S. Treasury bond yields sourced from the U.S. Department of the Treasury http://www.treasury.gov. Chart is provided for illustrative purposes only. TEY = Taxable Equivalent Yield at tax rate assumption stated.

062218_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph5

Data as of 6/22/2018

Sources: Apple Inc. bond yields provided by SQX https://sqx.com/. Municipal bond yields sourced from the Bond Buyer Data Workstation www.bondbuyer.com and MBIS www.mbis.com. Chart is provided for illustrative purposes only. TEY = Taxable Equivalent Yield at tax rate assumption stated.

062218_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph6

Data as of 6/22/2018

Sources: Apple Inc. bond yields provided by SQX https://sqx.com/. Municipal bond yields sourced from the Bond Buyer Data Workstation www.bondbuyer.com and MBIS www.mbis.com.  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 at tax rate assumption stated.

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 reflection 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 10.

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

062218_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph7

Data as of 6/22/2018

Sources: VanEck www.vaneck.com, iShares by BlackRock www.ishares.com, and 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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