Rieger Report®: Munis Move Cheaper in “Risk-on” September

Posted on by riegerreport

Municipal Bond Market: September “Risk on”…For Now

  • Muni yields moved with U.S. Treasuries as “risk on” returns in early September. Short-end and belly of thecurve hit hardest creating opportunities to pick up relatively cheaper bonds.
  • The shift results in high quality munis being competitive alternatives for income. Compared to the 1.8% dividend yield of the SPDR S&P 500 ETF, the IHS Markit Municipal Bond AAA yield shifted 30bps cheaper since month-end to yield 1.53% (or 2.53% Taxable Equivalent Yield assuming 37% tax rate).
  • Compared to corporate bonds, such as Apple Inc. bond issues, yields for AAA munis remain rich 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 September 16th 2019 at 95% illustrating that munis are still pricey relative to U.S. Treasury bonds.
  • Pension obligation shortfall impact: (Key states to watch: Illinois, Connecticut & New Jersey)

Source: S&P Dow Jones Indices, LLC. Data as 9/16/2019.

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

RiegerReport_091719

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 9/16/2019.

RiegerReport_091719_1

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 9/16/2019.

RiegerReport_091719_2

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 9/16/2019.

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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