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

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

Municipal bonds yields move lower in March while UST bond yields rise. The BondWave AA QCurve at the 10-year mark ended March at 1.375% representing a 3.5bps shift lower since month-end February while the 10-year UST moved higher by 30bps.

  • Relative Value: Generally, AA municipal bond yields at the 37% marginal tax bracket have now moved rich v. US Treasury and high-grade corporate bonds like bonds issued by Apple Inc. and Microsoft. Taxable bond yields have shifted higher, while demand for munis remains strong. Expectations of future higher taxes have helped hold muni yields down.  The very short end of the curve is the only exception as risk-off investors have held taxable yields low in that range making short term munis appear cheap.
  • Demand: Municipal bond ETFs saw positive March inflows bringing the year-to-date inflow total to over $5billion. Assets in municipal bond ETFs now total over $68.8billion.
  • 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 1.41% (as of 3/30/2021) making municipal bonds 10 years out and longer attractive relative to dividends.

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 3/31/2021 with exception of S&P 500 SPY dividend yield as of 3/30/2021

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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 of 3/31/2021 with exception of SPY Dividend yield which is as of 3/30/2021.

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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 of 3/31/2021.

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 3/31/2021. *Yield to Maturity and SPY dividend yield as of 3/30/2021.

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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