The debate over which sector of municipal bonds, general obligation bonds (G.O.’s) or revenue bonds can provide a better return is a constant one.  So far in 2016, the S&P Municipal Bond Revenue Index has outperformed verses the S&P Municipal Bond General Obligation Index.

Peeling the onion back a bit may help provide more insights.

• In general, revenue bonds have a higher coupon and higher yield than general obligation bonds so that is a factor in return performance under normal market conditions.  Year to date the G.O.’s have returned 3.49% while revenue bonds have returned 4.7%.
• While revenue bonds have indeed outperformed, the bond issues that are below investment grade revenue bonds are also a contributing factor.  The S&P Municipal Bond High Yield Ex-Puerto Rico Index is up over 7.3% year-to-date and the majority of those bonds are revenue bonds and not general obligation bonds.  In contrast, the S&P Municipal Bond Investment Grade Index which includes both G.O.’s and revenue bonds has returned over 3.8% year-to-date.  (Note: Selected the S&P Municipal Bond High Yield Ex-Puerto Rico Index as Puerto Rico revenue bonds have seen a significant rebound in 2016 and would further skew the results).

Select municipal bond indices, their yields and total returns:

Source: S&P Dow Jones Indices, LLC. Data as of July 21,2016. Table is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

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