AA Municipal Bond Yields v. US Treasury & Corporate Bond Yields
Demand for municipal bonds continues to push yields lower in May. The BondWave AA QCurve at the 10-year mark ended May at 1.21% representing a modest 3bps shift lower since month-end April while the 10-year UST moved lower by 7bps. The relentless supply / demand imbalance has been exacerbated by higher tax expectations helping to hold tax-exempt bond yields low.
- Relative value: Generally, AA municipal bond yields at the 37% marginal tax bracket continue to be rich v. US Treasury and high-grade corporate bonds like bonds issued by Apple Inc. and Microsoft.
- Demand: Municipal bond ETFs saw positive May inflows bringing the year-to-date inflow total to over $8.5billion. Assets in municipal bond ETFs now total $72.9billion (as of 5/29/2021).
- I’m keeping an eye on dividends paid by S&P 500 companies. The dividend yield of the SPDR S&P 500 (SPY) ETF held relatively steady during May at 1.33%. Generally, municipal bonds with maturities 10 years and longer remain 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 5/27/2021 except as noted
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 5/28/2021 with exception of SPY Dividend yield which is as of 5/27/2021.
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 5/28/2021.
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 5/27/21. ** SPY total return as of 5/28/2021.
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
Notes:
- Taxable Equivalent Yield = Tax Exempt Yield / (1 – Federal Tax Rate)
- 2021 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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