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Municipal Bond Market: October Month-End

• High grade tax-exempt munis have begun to form better value as the IHS Markit Municipal Bond AAA yields on the short end show relative value strengthening v. corporate bonds. On the longer end, 20 plus years, some munis are becoming more attractive v. corporate bonds.
• Compared to the 1.8% dividend yield of the SPDR S&P 500 ETF, the IHS Markit Municipal Bond AAA yield at mid-month was 1.48%. 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 old school 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 October at 95% (down from a ratio of 98% at September month end) reflecting that munis inched richer v. the U.S. Treasury yields in October.
• 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 86bps 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 10/31/2019.

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 10/31/2019. (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 10/31/2019.

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 10/31/2019.

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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