AA Municipal Bond Yields v. US Treasury & Corporate Bond Yields
Post election tax uncertainty has pushed municipal bond yields down by over 40bps in November. Municipal bonds have rallied as a result of potential higher taxes in the future fueling demand while there has been a modest drop in supply.
- Relative value: At the 37% marginal tax bracket, AA municipal bond yields reflect a strong relative value v. US Treasury and high-quality corporate bonds like Apple Inc. and Microsoft. At the 24% marginal tax bracket, AA municipal bonds are at parity with corporate bonds from a taxable equivalent yield perspective.
- Municipal bond ETFs now total over $61billion in assets with inflows of over $2billion in the last 30 days.
- Verses dividends of the S&P 500 companies, for higher tax bracket investors municipal bonds show more and more value as dividends continue to drop.
Duration risk: The yield shifts impact the duration calculations. The effective duration difference between the largest muni bond ETF, iShares MUB and the iShares LQD (investment grade corporate bonds) has risen from 3.4yrs at month-end October to 3.7yrs at month-end November.
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 11/30/2020.
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 11/30/2020 with exception of SPY Dividend yield which is as of 11/27/2020.
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. Taxable Equivalent Yields (TEY) are calculated using the stated marginal tax-rate. Data as 11/30/2020.
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 11/30/2020. *S&P 500 ETF Dividend Yield as of 11/27/2020.
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 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 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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