AA Municipal Bond Yields v. US Treasury & Corporate Bond Yields
Demand for high quality municipal bonds results in the muni market moving up (yields down) while corporate bond yields see a bump cheaper.
- Relative value: At the 37% marginal tax bracket, AA municipal bond yields reflect an incremental relative value v. US Treasury and high-quality corporate bonds like Apple Inc. and Microsoft BUT only on the very short and long end of the curve. In the belly of the curve, munis rallied pushing yields lower and making them relatively rich when compared to high quality corporate bonds.
- Municipal bond ETFs now total over $62.9billion in assets with inflows of over $3.3billion in the last 30 days.
- Keeping an eye on dividends paid by S&P 500 companies. Recent drops in the average dividend yield of the SPDR S&P 500 (SPY) ETF continues to make the yield of higher quality munis appear attractive.
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 3.67yrs at mid-month December.
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 12/15/2020.
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 12/15/2020 with exception of SPY Dividend yield which is as of 12/14/2020.
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. Taxable Equivalent Yields (TEY) are calculated using the stated marginal tax-rate. Data as 12/15/2020.
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 12/15/2020. *S&P 500 ETF Dividend Yield as of 12/14/2020.
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 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).
Click here for a print friendly version of the report.
