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Municipal Bond Market: Risk/Volatility Emerges

• Geopolitical risk overtakes markets driving yields for “risk off” asset classes down.
• Compared to the 1.85% dividend yield of the SPDR S&P 500 ETF, AAA munis remain rich from the short end to about 20 years out on the curve.
• Compared to corporate bonds, such as Apple Inc. bond issues, AAA munis have been driven into extremely rich territory across the curve, even 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 August 14, 2019 at 94% 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)
  • The S&P Municipal Bond Illinois G.O. Index is yielding 2.36% and has once again widened v. the S&P Municipal Bond State G.O. Index yield of 1.37%. That spread is now 99bps and was 105bps at the beginning.
  • Both Connecticut, New Jersey G.O.s show a spread of 10bps to the broader index.
  • Rhode Island G.O.s are not showing market penalty at this time.

Source: S&P Dow Jones Indices, LLC. Data as 8/14/2019.

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

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 8/14/2019.

Sources: IHS Markit (Municipal bond yields), SPDR 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 8/14/2019.

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 8/14/2019.

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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