Rieger Report: Municipal Bonds v. U.S. Treasury & Corporate Bonds

Municipal Bond Market Underperforms

  • Even though munis compared to U.S. corporate bonds have underperformed so far in 2019, yields for investment grade munis have lost some luster v. U.S. Treasuries and high quality corporate bonds.
  • The muni/U.S. Treasury yield ratio on the long end of the AAA muni curve was about 105% of U.S. Treasury yields in December 2018, that ratio is now 95-96% which means munis relative to U.S. Treasuries have lost some appeal.
  • The short end of the muni curve and extending into the intermediate range of the curve for investment grade municipal bonds has been rich relative to U.S. Treasury Bonds, S&P 500 Dividend Yield and corporate bond yields. That has been exasperated in March as yields and spreads on the short end continue to widen in favor taxable bond alternatives.
  • Pension obligation shortfalls: While there has been no significant underperformance in 2019, yields for Illinois general obligation bonds are showing a penalty in the marketplace with the S&P Municipal Bond Illinois G.O. Index yielding 3.25% while the S&P Municipal Bond State G.O. Index yields 2.37%.

Source: S&P Dow Jones Indices, LLC. Data as 3/15/2019.

Select Asset Class Total Returns & Yields Year-to-Date

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Source: S&P Dow Jones Indices, LLC. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results. TEY = Taxable Equivalent Yield calculated at assumed tax rate indicated. Data as 3/15/2019.

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Sources: IHS Markit (Municipal bond yields), S&P Dow Jones Indices, LLC and the U.S. Department of Treasury. Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. Data as 3/15/2019.

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Sources: IHS Markit (Municipal bond yields) and Exchange Data International (Apple Inc. bond yields.) Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. TEY = Taxable Equivalent Yield calculated at assumed tax rates indicated. Data as of 3/15/2019.

Data Resources Used in this Report:

Notes:

  • Taxable Equivalent Yield = Tax Exempt Yield / (1 – Federal Tax Rate)
  • 2019 tax brackets, however not all tax brackets are represented herein
  • End of day yields are used

Analyst Disclosure:

  • At the time of this writing, JR Rieger owns individual municipal bonds and a municipal bond fund. JR does not own bonds issued by Apple Inc.

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