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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