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

Munis: What I Like at the Mid-Year Mark

Individual muni bonds:

  • Essential purpose revenue bonds in the 8 – 15 year range that are rated in the BBB to AA ratings categories
  • Short end is rich, long end is not offering significant incremental yield for the duration risk
  • Other revenue bonds (healthcare, housing, industrial development etc.) in the BBB to A ratings categories
  • Important caveats: If being tactical these bonds can provide incremental yield (be prepared to sell as spreads widen otherwise stay with funds). Transaction costs can offset any incremental yield earned.

I.G. municipal bond ETFs: iShares MUB and Vanguard VTEB are two good examples

  • Low cost beta exposure to the I.G. muni bond market
  • Larger municipal bond ETFs (i.e. MUB, VTEB) indicate a comparative value from a Taxable Equivalent Yield perspective relative to the taxable yield of large corporate bond ETFs
  • Both are shorter duration than large corporate bond ETFs in general
  • Both MUB and VTEB have good liquidity (as represented by ETF share trade volume)
  • Supply / demand imbalance will take a lot of supply or disruption to dislodge in the near term

High yield muni bond ETFs: VanEck Vectors HYD and SPDR HYMB

  • Incremental yields v the risks
  • Near term, spreads can widen but I don’t see any time bombs or problematic issues that haven’t been already priced into the market. Longer term, pension challenges persist and surprises can happen so the ease of selling shares of an ETF instead of bond issues is valuable.

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

062918_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_MIDYEAR_Graph1

Data as of 6/29/2018

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 results. TEY = Taxable Equivalent Yield calculated at an assumed 37% tax rate.

062918_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_MIDYEAR_Graph2

Data as of 6/29/2018

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.

062918_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_MIDYEAR_Graph3

Data as of 6/29/2018

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.

062918_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_MIDYEAR_Graph4

Data as of 6/29/2018

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.

062918_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_MIDYEAR_Graph5

Data as of 6/29/2018

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.

Data Resources 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

Analyst Disclosure:

  • JR Rieger and or the Rieger Report LLC has not received compensation either directly or indirectly from the sponsor(s) of the ETF(s) included in this report.
  • At the time of this writing, JR Rieger does not own the ETF(s) cited in this report, nor bonds issued by Apple Inc.
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