Thoughts in Charts: Municipal Bond Double-Take

I love when a chart makes you do a double take. When a chart makes you go “Yes!” but then after another minute “Oh”.

Because municipal bond yield is usually exempt from state, local and federal taxes, investors are willing to take less yield than they would for a treasury – thus the squiggly line is under 100 most of the time.

Cue 2020. Yield from 10-year yield from municipals is now better than what we can get from a 10-year treasury.

Wait, wait, before you think you figured out how to get some steady income from municipal issued bonds, it’s worth a pause to remember the math driving the line in this chart. The 10-year treasury yield (the base of the number) has gone from well over 2% to about .70%. It doesn’t take much muni yield to create a number that will graph higher than 100.

In fact, muni yield has been on a wild ride in 2020, but has settled out at an all-time low as well. Ouch! The main advantage of buying a municipal fund is the tax savings on the yield. Unfortunately, this space is also facing significant challenges as municipalities and states struggle with revenue losses during COVID. It is unclear how badly our local governments are struggling because their fiscal year has just ended, and they don’t report for several more months.

Clearly this is a space we are watching closely.

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