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

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

Year-to-date flows into municipal bond ETFs approach $10billion and assets now total over $58.7billion. 30-day inflows of over $1.6billion into municipal bond ETFs reflect a swing in investor sentiment since September.  AA municipal bond yields have risen as a wave of new issue supply was met with a decline in demand.  The result AA municipal bonds have swung further into the “cheap” category relative to US Treasury bonds and high-grade corporate bond issues.

  • Relative value: At both the 37% and 24% tax brackets, AA municipal bond yields reflect a strong relative value v. US Treasury and high-quality corporate bonds like Apple Inc. and Microsoft.
  • The dividend yield of the largest S&P 500 ETF (SPDR SPY) has dropped to 1.64%, this coupled with the rising yields of municipal bonds have placed muni bonds is a relative value position v. high dividend stock.

Duration risk: The effective duration of the largest muni bond ETF, iShares MUB, ended 2.75years shorter than the iShares LQD (investment grade corporate bonds), down from a spread of 3.5years at month-end September.  Rising muni yields have extended duration risk for municipal 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 10/16/2020.  SPDR SPY dividend yield as of 10/15/2020.

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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 10/16/2020 with exception of SPY Dividend yield which is as of 10/15/2020.

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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 10/16/2020.

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

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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 10/16/2020.  S&P 500 ETF Dividend Yield as of 10/15/2020.

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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