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Municipal Bond Market: October Mid-month

• High grade tax-exempt munis remain rich relative to high quality corporate bonds overall. Exception being for the very short end of the curve and the extreme long end of the curve but only for the highest tax bracket.
• Compared to the 1.83% dividend yield of the SPDR S&P 500 ETF, the IHS Markit Municipal Bond AAA yield at mid-month was 1.39%. Ten year AAA munis remain attractive relative to the SPDR Dividend Yield for tax brackets higher than the 24% bracket. At the 24% tax bracket it’s a push.
• 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 mid-month October at 91% (down from a ratio of 98% at September month end) pushing munis back into being relatively rich when compared to the UST yields.
• Pension obligation shortfall impact: (Key states to watch: Illinois & New Jersey).
  • The spread between the S&P Municipal Bond Illinois G.O. Index and the S&P Municipal Bond State G.O. Index yield has remained steady since month end September at about 87bps but was wider at 105bps at the beginning of the year.
  • 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 10/15/2019.

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

Sources: iShares by BlackRock, SPDRs and Yahoo.com 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 10/15/2019. (1) SPDR S&P 500 ETF Yield is Dividend Yield.

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 10/15/2019.

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 10/15/2019.

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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