Rieger Report®: Municipal v. Corporate Bonds

AAA Municipal Bond Yields v. Apple Inc. & Microsoft Corp. Bond Yields

The recent RO/RO Coronavirus driven market volatility has created a paradox in the bond markets:

  • On the short-end of the curve, both the nominal tax-exempt yield of AAA municipal bonds and their Taxable Equivalent Yields are more attractive than yields of the high-quality corporate bonds issued by Apple Inc. and Microsoft Corporation.
    • How can AAA tax-exempt municipal bond yields be higher than high quality corporate bonds? In my opinion, the marketplace has reacted to potential near-term recessionary risks that may impact municipal bond issuers. For high-quality bonds issued by local municipalities, I feel this is an overreaction creating this value proposition for munis over corporate bonds within the short-end of the curve.
  • When viewed from the Taxable Equivalent Yield lens, for those impacted by the higher Federal tax rates, AAA municipal bond yields are attractive across the curve relative to the high quality taxable corporate bonds issued by Apple Inc. and Microsoft Corporation.

AAA Municipal Bond Yields v. Apple Inc. & Microsoft Corp. Bond Yields

RiegerReport_040220_1

Sources: IHS Markit (Municipal bond yields and bond prices & yields for Apple Inc. and Microsoft Corporation bond issues). Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. TEY = Taxable Equivalent Yield at stated tax rate. Data as 4/1/2020.

Data Resources Used in this Report:

  • IHS Markit www.ihsmarkit.com, Price Viewer for yields of corporate bonds and the IHS Markit Municipal Analytics Curve for AAA municipal bond yields.

Notes:

  • Taxable Equivalent Yield = Tax Exempt Yield / (1 – Federal Tax Rate)
  • 2020 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’s fixed income related holdings include investment grade individual municipal bonds, insured municipal bonds, a municipal bond money market fund and a position in the VanEck Vectors High-Yield Municipal Index ETF (HYD)

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