June 29, 2023
Over the last 18 months, yields have adjusted dramatically higher due to selling pressure in the
municipal bond market against the backdrop of rising interest rates. We think
current high municipal yields may offer an attractive entry point for investors seeking
The value proposition for municipal bonds appears notably more attractive when
considering the taxable-equivalent yield. For example, at the top tax bracket, a
30-year AA-rated New York municipal bond’s taxable-equivalent yield is 6.52%, but at the
22% tax bracket (not shown in the chart), that taxable-equivalent yield would still be
an attractive 4.95%.
Taxable-equivalent yield on a municipal bond versus taxable alternatives for top US income tax bracket
As of May 31, 2023
* Taxable-equivalent yield. The top Federal Income Tax Bracket of 37% plus 3.8% Medicare tax were used to calculate the taxable equivalent yield of the bond. The blue bar represents the difference between the yield of the bond (green bar) and the taxable equivalent yield.
Source: Municipal Market Data (MMD)/Bloomberg, as of May 31, 2023.
Chart is for illustrative purposes only.
What this means for investors
Municipal bond yields remain at elevated levels after the most recent Fed rate hike in May 2023. Given this environment, we think municipal bonds appear more attractive versus other fixed income options, even before applying the tax benefits.
Exploring investment opportunities in municipal bonds may make sense for today’s income investors, not just those in the highest tax brackets.