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

Posted on by riegerreport

Municipal Bond Market: Expensive!

  • Relative to other fixed income options, municipal bonds continue to be expensive. This remains particularly evident on the short end of the curve extending into the “belly” of the curve.
  • Compared to the 1.94% dividend yield of the S&P 500 Index, AAA munis remain rich from the short end to about 7 years out on the curve.
  • Compared to corporate bonds, such as Apple Inc. bond issues, AAA munis remain rich across the curve.
  • 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 89% (up from 83% at mid-month May) illustrating that munis are still 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 is still compressing as the market seeks yield paper. The S&P Municipal Bond Illinois G.O. Index is yielding 2.66% and continues to narrow v. the S&P Municipal Bond State G.O. Index yield of 1.78%. That spread is now 88bps and was 105bps at the beginning of the year.
    • Yields for Connecticut general obligation bonds are showing a 14bps penalty (cheaper) to the G.O. index and yields for Illinois general obligation bonds are showing a 10bp spread.

Source: S&P Dow Jones Indices, LLC. Data as 6/11/2019.

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 6/11/2019.

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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 6/11/2019.

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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 6/11/2019.

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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. Data as of 6/7/2019.

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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