Indexology: High Yield Munis Burnt by Tobacco Bonds

Tobacco settlement  bonds tracked by the S&P Municipal Bond Tobacco Index are down nearly 9% year to date as yields have risen by over 255bps as the credit risk of these long duration bonds is questioned.  Recent arbitration results have been positive but uncertainty over future disputes and tobacco consumption are pulling these long duration bonds down.  The average duration of the S&P Municipal Bond Tobacco Index is over 11.5 years.

The S&P Municipal Bond Index, which includes tobacco settlement bond issues that are  below investment grade, is down over 4.5% year to date with yields rising by over 150bps.  The tobacco bond exposure helps lengthen the duration of the index to over 9 years.

By comparison, the S&P U.S. Issued High Yield Corporate Bond Index has a duration of over 4.8 years and is up 3.6% year to date.

Source: S&P Dow Jones Indices LLC and/or its affiliates. Data as of October 9, 2013. Charts and graphs are provided for illustrative purposes. Past performance is no guarantee of future results.

James R. Rieger is vice president, Fixed Income Indices, at S&P Dow Jones Indices. With over 30 years of fixed income experience, J.R. leads S&P Dow Jones Indices’ effort to reach into areas of the capital markets beyond traditional equity, overseeing the creation and management of fixed income indices.