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

Munis: Hunt for Red October 

  • Rising interest rates have created a lot of early October red ink in the bond markets.
  • With exception of investors in the higher tax brackets, the municipal bond short end is still rich (0 – 3 year range) relative to other options available such as S&P 500 dividend yield (1.9%), UST bond and corporate bond yields.
  • The intermediate and long end of the muni curve has shifted cheaper creating the opportunity to bring on bonds with some relative yield.
  • In comparing high quality muni v corporate bonds: excluding the short end of the curve, yields of AA and higher munis are still attractive for higher tax bracket market participants.
  • Yield curve shifts in October so far:

10 Year AAA Municipal Bonds  +6bps

10 Year US Treasury Bond   +17bps

10 Year Apple Inc. Bonds  +13bps

RR092118_Chart1Data as of 10/5/2018 

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 . Current indicated dividend yield is used. Chart is provided for illustrative purposes only.

RR092118_Chart2

Data as of 10/5/2018

Sources: Municipal bond yields sourced from the Bond Buyer Data Workstation www.bondbuyer.com and MBIS www.mbis.com Municipal Yield Curves, U.S. Treasury bond yields sourced from the 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.

RR092118_Chart3

Data as of 10/5/2018

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.

RR092118_Chart4

Data as of 10/5/2018

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. In September 2018 JR Rieger purchased insured municipal bonds in the 10 year range.
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