Rieger Report®: Municipal v. US Treasury & Corporate Bonds

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AAA Municipal Bond Yields v. US Treasury & Corporate Bond Yields

High quality municipal bonds rebounded back into demand as munis yields drop driving prices higher. However, Investment grade munis have still been outpaced from a YTD total return perspective by investment grade corporate bonds as concerns mount about the COVID-19 impact on state & local governments. The Fed buying corporate bond ETFs certainly provides both emotional and demand support for that asset class.

  • Muni yields remain relatively cheap when compared to U.S. Treasury bond yields across the curve. (An old school metric that has limited relevance in this market)
  • The IHS Markit AAA Municipal Analytics Curve shows AAA bond yields have become rich relative to flagship or benchmark corporate bonds when viewed from any lens. AA and A municipal bonds are more of a relative value.
  • AAA muni bonds yields v. the SPY 500 Dividend Yield still gives the edge to SPY but that dividend yield is dropping and has moved approx. 20bps lower in two weeks. Keeping a keen eye on this.
  • Fund flows from ETF Action data shows that during the last 30 days over $1.56billion has flowed into municipal bond ETFs while investment grade corporate bond ETFs have seen inflows of over $10.5billion.

Sources: IHS Markit (Municipal bond yields and bond prices & yields for Apple Inc. and Microsoft Corporation bond issues) and ETF Action. 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 5/29/2020.

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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 5/29/2020 with exception of SPY Dividend yield which is as of 5/28/2020.

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

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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 5/29/2020.

Select Asset Class Total Returns & Yields Year-to-Date

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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 5/29/2020. 1SPDR yields as of 5/28/2020. S&P 500 ETF Yield is Dividend Yield.

Data Resources Used in this Report:

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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