Rieger Report®: Munis v. US Treasuries and Corporate Bonds

Posted on by riegerreport

Municipal Bond Market: Bonds in Demand

  • Demand soaks up new muni supply as yields continue to fall into rich/extremely rich territory for all tax brackets when compared to other taxable investment grade fixed income alternatives.
  • Over the entire curve, municipal bonds display yields that are 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 83% 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 have fallen and the penalty has compressed as the market seeks yield paper. The S&P Municipal Bond Illinois G.O. Index is yielding 2.84%, or a 93bp penalty v. the S&P Municipal Bond State G.O. Index yield of 1.91%. That spread was 105bps at the beginning of the year.
    • Yields for Connecticut and New Jersey general obligation bonds are showing no dramatic penalty v. the overall market.

Source: S&P Dow Jones Indices, LLC. Data as 5/15/2019.

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

Even at highest tax bracket, munis appear rich when compared to corporate bonds.

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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 5/15/2019.

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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 5/15/2019 with exception of S&P 500 Dividend Yield as of 5/15/2019.

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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 5/15/2019.

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Sources: IHS Markit (Municipal bond yields) and Crane Data (Crane CD Indexes). 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. CD data as of 5/13/2019.

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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