AA Municipal Bond Yields v. US Treasury & Corporate Bond Yields
Municipal bonds start 2021 in the right direction while other fixed income asset classes shift lower. High demand for municipal bonds continues. The BondWave AA QCurve steepened on the long end (yields rose) but the belly of the curve remained strong. The result is that investment grade municipal bonds end up still 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. Relative to high-quality corporate bonds like Apple Inc. and Microsoft the yields on AA munis are now less attractive.
- Municipal bond ETFs reflect the demand as assets now total over $67billion with inflows of over $2.7billion for the month of January.
- Keeping an eye on dividends paid by S&P 500 companies. The dividend yield of the SPDR S&P 500 (SPY) ETF shifted lower again ending at 1.51% (as of 1/28/2021) and now that muni yields have dropped further needs evaluation on a case-by-case basis to determine relative rich/cheap decisions.
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 1/29/2021 with exception of S&P 500 SPY.
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 of 1/29/2021 with exception of SPY Dividend yield which is as of 1/28/2021.
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 1/29/2021.
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 1/29/2021. *S&P 500 ETF Dividend Yield as of 1/28/2021.
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
- 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
- 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).