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Municipal Bond Market: Bonds in Demand

• April saw continued high demand for municipal bonds driving yields higher. Sporadic increases in supply have been quickly absorbed.
  • Year-to-date the S&P Municipal Bond Index has returned 3.1% v. the S&P 500 Bond Index (corporate bonds) returning 5.33%.
• Over the entire curve, municipal bonds have now moved rich relative to U.S. Treasury and 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 85 – 88% illustrating that munis have gotten pricey relative to U.S. Treasury bonds.
• Pension obligation shortfall impact: (Key states to watch: Illinois, Connecticut & New Jersey)
  • Yields for Illinois general obligation bonds are showing a penalty in the marketplace with the S&P Municipal Bond Illinois G.O. Index yielding 3.06%, or a 101bp penalty v. the S&P Municipal Bond State G.O. Index yield of 2.05%.
  • Yields for Connecticut and New Jersey general obligation bonds are showing no real penalty v. the overall market.

Source: S&P Dow Jones Indices, LLC. Data as 4/30/2019.

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

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 4/30/2019.

AAA Municipal Bond Yields Relative to UST Yields & S&P 500 Dividend Yield

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 4/30/2019.

AAA Municipal Bond Yields & Taxable Equivalent Yields v. Apple Inc. Bond Yields

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 4/30/2019.

Data Resources Used in this Report

• Municipal bond yields: IHS Markit www.ihsmarkit.com
• Apple Inc. bond yields: Exchange Data International Ltd. (EDI) www.exchange-data.com
• U.S. Treasury bond yields: U.S. Department of Treasury https://www.treasury.gov
• Index data: S&P Dow Jones Indices, LLC. www.spindices.com

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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