AA Municipal Bond Yields v. US Treasury & Corporate Bond Yields
Municipal bonds finish 2020 looking rich relative to their investment grade corporate bond alternatives.
- 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 end of the curve. In the belly and the long end of the curve, municipal bond yields have fallen to the point that its either a “push” v. corporate bonds or munis are expensive from a yield perspective depending on the taxable equivalent yield used.
- Municipal bond ETFs now total over $64.2billion in assets with inflows of over $14billion for the year and just under $3billion for the last 30days.
- Keeping an eye on dividends paid by S&P 500 companies. The dividend yield of the S&P 500 (SPY) ETF shifted lower again ending at 1.53% (as of 12/30/2020) as a result, municipal bond yields when viewed from the lens of the taxable equivalent yield are relatively attractive v. dividends of large cap companies.
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 12/31/2020.
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 12/31/2020 with exception of SPY Dividend yield which is as of 12/30/2020.
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 of 12/31/2020.
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 12/31/2020. *S&P 500 ETF Dividend Yield as of 12/30/2020.
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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