Rieger Report®: Fed Rate Cut Ads More Fuel to Muni Demand

Posted on by riegerreport

Municipal Bond Market: Expensive Summer Continues

  • Fed rate cut ads more fuel to the demand. Highest tax bracket muni investors may find some value in munis but overall investment grade munis remain rich relative to other options. Technical supply demand factors still weigh heavily in the muni market helping keep muni prices high.
  • Compared to the 1.89% dividend yield of the S&P 500 Index, AAA munis remain rich from the short end to about 15years 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 ended July at 91% illustrating that munis are still pricey relative to U.S. Treasury bonds.
  • Pension obligation shortfall impact: (Key states to watch: Illinois, Connecticut, New Jersey & Rhode Island)
    • 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 2.60% and has narrowed v. the S&P Municipal Bond State G.O. Index yield of 1.72%. That spread is now 88bps and was 105bps at the beginning. Demand for higher yielding bonds is a driving factor.
    • There is no significant yield penalty for Connecticut, New Jersey or Rhode Island G.O.s.

Source: S&P Dow Jones Indices, LLC. Data as 7/31/2019.

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

ReigerReport_080119_1

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 7/31/2019.

ReigerReport_080119_2Sources: 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 7/31/2019 with exception of Dividend Yield which is as of June 17, 2019.

ReigerReport_080119_3

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 7/31/2019.

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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