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

Munis: Hunt for Red October 

  • Municipal bonds have underperformed in red October relative to other risk off assets such U.S. Treasuries and high quality Apple Inc. bonds. This leaves them relatively more attractive on the longer end of the curve relative.
  • Short end: With the exception of the highest tax bracket investors, high quality municipal bond yields 0 -5 years are now attractive relative to the S&P 500 Dividend Yield and relative to U.S. Treasury bonds. The short end remains in the overpriced category for lower tax bracket investors.
  • Belly of the curve: Municipal bonds in the 7 – 12 year range are relatively cheap from a Taxable Equivalent Yield perspective for most tax bracket investors.
  • Sectors can make a difference: The S&P Municipal Bond Tobacco Index (tracking tobacco settlement bonds) was down 2.45% in total return for October to date. These bonds are typically held in municipal high yield mutual funds.
  • Yield curve shifts in October so far: (data as of 10/26/2018):

10 Year AAA Municipal Bonds  +12.6bps

10 Year US Treasury Bond   +3bps

10 Year Apple Inc. Bonds  +8bps

RR1029118_Chart1.jpg

Data as of 10/26/2018.

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 data as of 10/26/2018 and was sourced from S&P Dow Jones Indices www.spdji.com . Current indicated dividend yield is used. Chart is provided for illustrative purposes only.

RR1029118_Chart2

Data as of 10/26/2018.

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.

RR1029118_Chart3

Data as of 10/26/2018.

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.

RR1029118_Chart4

Data as of 10/26/2018.

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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