Tobacco Bonds Experience 0.4% Drop in Market

Tobacco Bonds Experience 0.4% Drop in Market

Hugo Rodriguez
2 min read

Tobacco Bonds Experience 0.4% Drop Amid Declining Smoking Rates

In a blow to the high-yield municipal debt market, tobacco bonds have seen a 0.4% drop this year due to declining smoking rates. The resulting $5.8 billion payout to US states is the lowest since 1999, impacting bond payments. However, there is potential for recovery as speculative-rated tobacco debt now offers a 6.2% yield, surpassing the broader high-yield index's 5.5%. The market has been further shaped by a decrease in available securities and a recent decision by the Biden administration to delay a potential ban on menthol cigarettes, seen as a positive development for the sector. Experts remain cautiously optimistic, citing the potential for incremental spread capture in the currently beleaguered bonds.

Key Takeaways

  • Tobacco bonds are the worst performers in high-yield municipal debt, with a 0.4% drop year-to-date.
  • The $5.8 billion received by US states from tobacco companies is the lowest since 1999, impacting bond payments.
  • Speculative-rated tobacco debt yields have risen to 6.2%, offering potential for recovery.
  • The decline in smoking rates and reduced payments have led to a negative investor reaction.
  • Scarcity and regulatory decisions, like the delay in the menthol cigarette ban, heavily influence the tobacco bond market.


The drop in tobacco bonds impacts US states' bond payments, with $5.8 billion being the lowest received since 1999. Decreasing smoking rates and reduced payments have caused a negative investor reaction. Speculative-rated tobacco debt now offers a 6.2% yield, potentially attracting investors. The scarcity of available securities and regulatory decisions like the delayed menthol cigarette ban shape the market. Financial institutions and municipalities with tobacco bonds may face financial strain in the short term, but long-term consequences depend on future regulatory decisions and smoking rate trends. Countries reliant on tobacco exports may also suffer from decreased demand.

Did You Know?

  • Tobacco bonds: These are municipal bonds secured by revenues from tobacco companies, typically resulting from a legal settlement between states and tobacco manufacturers. The payments from these bonds fund various projects and initiatives, often related to healthcare.
  • Speculative-rated tobacco debt: This refers to tobacco bonds with a lower credit rating, indicating a higher risk of default. These bonds typically offer higher yields to compensate for the added risk. A 6.2% yield on speculative-rated tobacco debt is currently higher than the broader high-yield index's 5.5%.
  • Menthol cigarette ban: A potential ban on menthol cigarettes by the Biden administration was recently delayed. This decision is seen as a positive development for the tobacco bond market, as menthol cigarettes contribute significantly to tobacco company revenues. A ban could have negatively impacted these revenues and, consequently, the payments made on tobacco bonds.

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