Rieger Report®: Munis v. Corporates

Municipal Bond Market: August was “Risk Off”

  • Muni yields drop as geopolitical risk overtakes markets driving yields for “risk off” asset classes down. “Surge” of new refunding issues have little impact on supply/demand imbalance.
  • Compared to the 1.85% dividend yield of the SPDR S&P 500 ETF, AAA munis remain rich with exception of the extremely long end of the curve.
  • Compared to corporate bonds, such as Apple Inc. bond issues, yields for AAA munis are expensive with the exception of the very long end of the curve and only for the higher tax bracket investor base.
  • 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 30, 2019 at 97% 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)

Source: S&P Dow Jones Indices, LLC. Data as 8/30/2019.

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

ReigerReport_083119_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 8/30/2019.

ReigerReport_083119_2

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 8/30/2019.

ReigerReport_083119_3.jpg

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 8/30/2019.

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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