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

Munis: Key Takeaways

  • Short end still rich relative to other options available
  • Long end is still relatively flat offering no real incremental yield v the duration risk
  • Muni v corporate bonds: excluding the short end of the curve, munis are still attractive for higher tax bracket market participants
  • I.G. municipal bond ETFs are good options for beta exposure: 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 still appear attractive: VanEck Vectors HYD and SPDR HYMB are two good examples
    • 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

071318_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph1

Data as of 7/13/2018

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.

071318_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph2

Data as of 7/13/2018 with exception of S&P Dividend Yield being as of June 30, 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.

071318_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph3

Data as of 7/13/2018

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.

071318_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph4

Data as of 7/13/2018

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.

071318_ReigerReport_AAAMunicipalBondvsUSTreasuryCorporateBonds_Graph5

Data as of 7/13/2018

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.
  • Between July 1st and July 13th 2018, JR Rieger purchased insured municipal bonds and AA and higher rated municipal bonds in the 8 – 14 year maturity range.
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