AA Municipal Bond Yields v. US Treasury & Corporate Bond Yields
Investor flows into muni ETFs have slowed but are still positive. Municipal bond ETFs have attracted $1.46billion in assets in the last 30 days, $8.7billion year-to-date and now total over $57.8billion. In comparison, fixed rate investment grade & broad credit corporate bond ETFs have gained over $52billion in assets year-to-date and total over $219billion.
- Relative value: Across the curve for high tax-bracket investors, AA Municipal bond yields have become attractive relative to high quality corporate bonds & U.S. Treasury bonds.
- One has to go down to the 24% marginal tax-rate to find AA municipal bond yields are matching yields on a Taxable Equivalent Yield basis to high quality corporate bonds.
- At tax-rates below the 24% marginal tax-rate, AA tax-exempt municipal bonds are rich relative to corporate bond equivalents.
Duration risk: The effective duration of the largest muni bond ETF, iShares MUB, ended month-end at 6.1 years v. the iShares investment grade corporate bond ETF LQD effective duration of 9.63 years. This should result in less volatility for MUB as interest rates fluctuate.
Sources: ETF Action, BondWave (Municipal bond yields), AdvantageData (Corporate bond yields) 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 9/15/2020.
Sources: BondWave (Municipal bond yields), AdvantageData (Corporate 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 9/15/2020 with exception of SPY Dividend yield which is as of 9/14/2020.
Sources: BondWave (Municipal bond yields), AdvantageData (Corporate bond yields). Chart is provided for illustrative purposes only. Past performance is not a guarantee of future results. Past performance is not a guarantee of future results. Taxable Equivalent Yields (TEY) are calculated using the stated marginal tax-rate. Data as 9/15/2020.
Select Asset Class Total Returns & Yields Year-to-Date
Sources: iShares by BlackRock and SPDRs. 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 9/15/2020. iShares ETF yields and S&P 500 ETF Dividend Yield as of 9/14/2020.
Data Resources Used in this Report:
- Municipal bond yields: BondWave
- Corporate bond yields: AdvantageData
- U.S. Treasury bond yields: U.S. Department of Treasury
- iShares ETF data: iShares ETFs
- Fund flows: ETF Action
- SPDR JNK Duration and SPY dividend yield: SPDR ETFs
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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