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

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

Municipal bond ETFs have attracted $3.1billion in assets in the last 30 days and $5.8billion year-to-date.  The pandemic continues to loom large over the muni market putting entertainment, healthcare and transportation related bond issues at elevated risk. Fixed rate investment grade corporate bond ETFs have gained over $43billion year-to-date.

  • At the highest tax level, the IHS Markit AAA Municipal Analytics Curve shows AAA bond yields have become competitive with Apple Inc. and Microsoft bond issue yields. AA and A municipal bonds are even more of a relative value.
  • Comparing AAA muni bonds yields v. the SPY 500 Dividend Yield still gives the edge to SPY but the sustainability of those dividends remains in question. The dividend yield has fallen from 1.91% at the end of May to 1.8% as of July 14th, 2020. Keeping a keen eye on this trend as unpredictability in dividend cash flow is a negative.
  • The duration of the largest muni bond ETF, iShares MUB, is now over 3.5 years shorter than the iShares investment grade corporate bond ETF LQD. This should result in less volatility for MUB as interest rates change.

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 7/15/2020.

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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 7/15/2020 with exception of SPY Dividend yield which is as of 7/14/2020.

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 6/30/2020

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 7/15/2020. 1SPDR S&P 500 ETF Yield is Dividend Yield as of 7/14/2020.

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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