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Municipal Bond Market: November Month End

• High grade tax-exempt munis have ended November rich as the IHS Markit Municipal Bond AAA yields on the short end show munis are expensive relative to Treasury and corporate bonds. On the longer end, 20 plus years, there could be opportunities to be selective and pick up bonds with incremental yield. The belly of the AAA muni curve, the 7 – 12 year range, continues to appear rich.
• Compared to the 1.71% dividend yield of the SPDR S&P 500 ETF, the IHS Markit Municipal Bond 10 Year AAA yield at mid-month was 1.48%. Ten year AAA munis remain attractive relative to the SPDR Dividend Yield for all but the lowest tax brackets.
• 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 for longer dated munis ended November at 94% reflecting that munis inched richer v. the U.S. Treasury 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 held at 83bps since mid-month November.
  • New Jersey G.O.s have also held their spread of 12bps to the broader index.
  • Conclusion: the market place is not considering pension risk a near term problem.

Source: S&P Dow Jones Indices, LLC. Data as 11/29/2019.

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 11/29/2019. (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 11/29/2019.

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 11/29/2019.

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
• Yahoo Finance www.yahoo.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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