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

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

Investor flows into muni ETFs remain positive but continue to slow. Municipal bond ETFs have attracted $796million (down from $1.46billion) in assets in the last 30 days, $8.9billion year-to-date and now total over $58.1billion. In comparison, fixed rate investment grade corporate bond ETFs have gained over $52billion in assets year-to-date and $4.5billion in the last 30 days.

Corporate and muni yields have risen reinforcing the value of AA tax-exempt bonds.

  • 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 (TEY) basis to high quality corporate bonds.
  • On the short-end of the curve, 0 – 5 years, AA munis at the 24% tax-bracket and above have a positive value proposition from a TEY basis.

Duration risk: The effective duration of the largest muni bond ETF, iShares MUB, ended 3.5 years shorter than the iShares LQD (investment grade corporate bonds) inferring less volatility if rates fluctuate v. corporate bonds.

Sources: ETF Action, BondWave (Municipal bond yields), AdvantageData (Corporate bond yields) and the U.S. Department of Treasury. Past performance is not a guarantee of future results.  Data as 9/30/2020.

RiegerReport_093020_1

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 9/30/2020 with exception of SPY Dividend yield which is as of 9/29/2020.

RiegerReport_093020_2

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.  Taxable Equivalent Yields (TEY) are calculated using the stated marginal tax-rate. Data as 9/30/2020.

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

RiegerReport_093020_3

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 9/30/2020.  S&P 500 ETF Dividend Yield as of 9/29/2020.

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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