Reward For Risk
- Wednesday, 02/29/2012
- High-yield muni bonds are at attractive spreads despite a recent rally in AAA munis
- Current yield spreads indicate a potential total return opportunity for investors
"Hey! Did you make a mistake?" you may ask after looking at the table below. "Well, no" I would reply. The table shows the yield spreads, or the difference in yields, between high-yield and investment grade munis, as measured by the Barclays Capital Municipal Bond Index and the Barclays Capital High Yield Municipal Bond Index† , respectively, measured as of January 1, 2012, and currently. Yes, the numbers are the same, during the recent YTD period [1/1/12 - 2/27/12] when AAA municipal yields hit all-time lows and then rose approximately 20 basis points [bps] as supply began to build.
Municipal Bond Spreads:
High Yield vs. Investment Grade Munis |
| As of
10/31/95 - 1/01/12 | As of
10/31/95 - 2/27/12 |
Current Yield Spread | 399 bps | 399 bps |
Long-Term Avg. Yield Spread | 272 bps | 272 bps |
Historic Minimum Yield Spread | 113 bps | 113 bps |
Historic Maximum Yield Spread | 636 bps | 636 bps |
Municipal high yields, thus far in 2012, continue to be priced at attractive spreads of 399 basis points, or 127 basis points above the long-term average of the past 16 years between the two Indices. Additionally, high-yield munis are currently offering nearly 4% more in yield than investment grade munis.
Looking forward, I believe that investment grade municipals will remain fairly stable given the Federal Reserve's stance. However, given the type of issuers that dominate the muni high yield space (airlines, oil services, paper, chemicals, autos, health care services, etc.), it is my opinion that if the economy improves, then a total return opportunity could be realized in high yield if the two Indices revert to their long-term average relationship of 272 basis points.
†The Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays Capital High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year.