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

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

“Risk-off” has been elevated as equity market volatility leads into the week of horrors for the markets with the election only 2 days away. Overall, bonds moved cheaper as well but biggest shifts seen in the junk bond market as “risk-off” is most evident there.

  • 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.
  • Bond ETF fund flows tell the story best: junk bond ETFs lost $4.8 billion in assets and muni ETF inflows have continued to slow to a pace of $1 billion, while still positive, down significantly from earlier months.

Duration risk: The effective duration of the largest muni bond ETF, iShares MUB, ended 3.4 years shorter than the iShares LQD (investment grade corporate bonds), about where it ended September.  Rising muni yields have extended duration risk for municipal bonds since mid-month October.

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 10/30/2020.

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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 10/30/2020 with exception of SPY Dividend yield which is as of 10/29/2020.

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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 10/30/2020.

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 10/30/2020. *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 various investment grade & high yield municipal bonds, insured municipal bonds, municipal bond money market funds and a position in the VanEck Vectors High-Yield Municipal Index ETF (HYD).

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