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Municipal Bond Market: January 2020

• Investment grade munis benefited from the risk-off Coronavirus driven market dynamics despite steady supply of new issues.
• The 10-year IHS Markit AAA Muni Yield at month-end was 1.15% down 36bps pretty much in line with he 10-year U.S. Treasury.
• Compared to the 1.71% dividend yield of the SPDR S&P 500 ETF, the IHS Markit Municipal Bond 10 Year AAA yield of 1.1.5% remain attractive relative for the highest tax bracket range investors only and that is very close. This should further fuel the dividend v. interest rate debate as we get deeper into 2020.
• The old school muni/U.S. Treasury yield ratio on the long end of the AAA muni curve was about 94% of U.S. Treasury yields in December 2019, that ratio for longer dated munis is currently about 90%, up about 4% during the month, reflecting that munis inched a bit cheaper v. the U.S. Treasury yields during January.
• 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 ended 2019 at around 83bps, now at 73bps.
  • New Jersey G.O.s have also kept their spread in a narrow range, currently at about 14bps.

Conclusion: the marketplace continues to ignore pension deficit risk in the near term.

Source: IHS Markit, S&P Dow Jones Indices, LLC. Data as 1/31/2020.

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 1/31/2020. (1) SPDR S&P 500 ETF Yield is Dividend Yield as of 1/30/2020.

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 1/31/2020 with exception of SPY Dividend yield which is as of 1/30/2020.

Data Resources Used in this Report:

• Municipal bond yields: IHS Markit www.ihsmarkit.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
• iShares ETFs: www.ishares.com
• SPDR ETFs: www.ssga.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.

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