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

Posted on by riegerreport

Municipal Bond Market: Not on Sale this Summer

  • Highest tax bracket muni investors may find some value in munis but overall investment grade munis are rich relative to other options.
  • Compared to the 1.90% dividend yield of the S&P 500 Index, AAA munis remain rich from the short end to about 9 years out on the curve.
  • Compared to corporate bonds, such as Apple Inc. bond issues, AAA munis remain rich across the curve with exception of the very long end and only for the higher tax brackets.
  • 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 94% (up from 88% at mid-month June) illustrating that munis are still pricey relative to U.S. Treasury bonds but beginning to show more value.
  • Pension obligation shortfall impact: (Key states to watch: Illinois, Connecticut & New Jersey)
    • Yields for Illinois general obligation bonds have not improved along with the muni market. The S&P Municipal Bond Illinois G.O. Index is yielding 2.6% and has widened v. the S&P Municipal Bond State G.O. Index yield of 1.54%. That spread is now 106bps and was 105bps at the beginning of the year and 88bps at mid-month June.
    • Yields for Connecticut general obligation bonds are showing a 32bps penalty (cheaper) to the G.O. index and yields for Illinois general obligation bonds are showing a 25bp spread. Both got relatively cheaper in the last several weeks.

Source: S&P Dow Jones Indices, LLC. Data as 6/28/2019.

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

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Sources: iShares by BlackRock, SPDRs. 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 6/28/2019.

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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 6/28/2019.

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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 6/28/2019.

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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