The opportunity still exists for taxable buyers to capture significant value in the taxable municipal market. Early adopters to the Build America Bond (BAB) and Qualified School Construction Bond (QSCB) programs continue to enjoy yields at measurable spreads to US Treasury bonds. The relative value of municipal bonds is is further demonstrated by the most recent bond issue from McDonald’s Corp (A3/A), who recently brought $750 million in debt to market. Last week, McDonalds priced $450 million in 10-year notes at a 3.548% yield, 55 basis points over comparable US Treasury bonds. McDonald’s also priced $300 million worth of 30-year notes to yield 4.921%, 85 basis points over comparable US Treasury bonds. The overly high prices paid for McDonald’s debt came as a surprise to most market experts.
Clearly, low-yielding U.S. Treasury bonds have driven investors to seek out higher returns in investment-grade bonds, but do corporate bonds provide the best value in today’s taxable fixed income market? By comparison, high quality taxable municipal bonds continue to trade at significant discounts to their corporate counterparts. For example, the Beverly Hills, CA Public Finance Authority (AA2/AA+) priced a deal the same week as the McDonalds corporate issue. In that deal, 15-year bonds were priced at a yield of 5.898%, 290 basis points over 10-year US Treasury bonds. The 30-year maturity in the Beverly Hills loan came in at 6.772%, 270 basis points over comparable US Treasury bonds. In a separate deal, Davie, Florida Water and Sewer (Aa3/AAA insured with an A1/A underlying rating) came to market with similar spreads to the Beverly Hills deal.
Here is a breakdown of some recent taxable municipal bond deals versus the McDonald’s corporate bonds:
While taxable municipal bonds remain extremely cheap versus corporate bonds, the early adopter phase will eventually run its course. In the meantime, Build America Bonds and QSCBs will continue to present significant value versus their corporate counterparts from both a credit quality and yield perspective. Truly, the honeymoon is not yet over for early adopters of Build America Bonds and Qualified School Construction Bond programs.