Municipal Bond Market: September Supply
- Wave of new issue supply absorbed by muni market but at a price. Yields suffered slightly as issuance wave hit and the result was that munis underperformed relative to UST and corporate bonds.
- The slightly higher yields for munis helps makes them competitive alternatives for income. Compared to the 1.86% dividend yield of the SPDR S&P 500 ETF, the IHS Markit Municipal Bond AAA yield shifted 30bps cheaper since month-end to yield 1.42% (or 2.25% Taxable Equivalent Yield assuming 37% tax rate).
- Even with the yield bump, 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 2019 at 98% getting back into attractive territory v. UST bonds.
- Pension obligation shortfall impact: (Key states to watch: Illinois, Connecticut & New Jersey).
- The S&P Municipal Bond Illinois G.O. Index is yielding 2.46% and has widened in September v. the S&P Municipal Bond State G.O. Index yield 1.6%. That spread is now 87bps and was 105bps at the beginning of the year.
- Both Connecticut, New Jersey G.O.s continue to show a spread of about 10bps to the broader index.
Source: S&P Dow Jones Indices, LLC. Data as 9/30/2019.
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 9/30/2019.
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 9/30/2019.
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 9/30/2019.
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
- 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
- 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.