Municipal Bond Market: February 2020
- Coronavirus driven market skewing is risk-off/risk-on asset class results.
- Investment grade munis continued to benefit from the risk-off Coronavirus driven market dynamics despite steady supply of new issues. Note on new issue supply: while rates have been pushed lower the forward-looking calendar for new issuance should go up as issuers take advantage of the risk-off environment,
- The 10-year IHS Markit AAA Muni Yield at month-end was 0.9%, down 34bps from month-end January and pretty much in line with the 10-year U.S. Treasury yield movements.
- Compared to the 1.89% dividend yield of the SPDR S&P 500 ETF, the IHS Markit Municipal Bond 10 Year AAA yield of 0.9% has shifted back towards being very rich from an income generation perspective relative to the equity market dividend yield. In my view, this is a temporary shift due to equity market downside volatility and should be considered carefully.
- 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 92%, up about 2% during the month, reflecting that munis inched a bit cheaper v. the U.S. Treasury yields during February. There is a much different story on the short-end of the muni curve as demand for risk-off assets like high quality muni bonds has driven the ratio for 5-year AAA muni yields to U.S. Treasury bonds to 82%. In my view, toss out this old school metric in determining relative value in this market for the near term. Alternatively, compare munis to high grade corporate bonds where possible.
Source: IHS Markit. Data as of 2/28/2020.
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 2/28/2020. (1)SPDR S&P 500 ETF Yield is Dividend Yield as of 2/27/2020.
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 2/28/2020 with exception of SPY Dividend yield which is as of 2/27/2020.
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
- Yahoo Finance www.yahoo.com
- iShares ETFs: www.ishares.com
- SPDR ETFs: www.ssga.com
- ETF Action: www.etfaction.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.