May 29, 2024
Driven by tax-exempt yields at levels not seen in more than a decade and favorable technical factors, municipal bonds have outperformed other fixed income asset classes over the 5-year period ended March 31, 2024. When taking taxable-equivalent yields into consideration , the below-investment-grade category, or high yield, has been the strongest-performing asset class in fixed income over the period.
Taxable-equivalent high yield municipal returns outperform all taxable fixed-income indices represented
Annualized total return, %
5 years ended March 31, 2024
Source: Morningstar Direct, March 31, 2024. Taxable equivalent returns are assuming 37% tax bracket and 3.8% Medicare tax. The performance quoted represents past performance and does not guarantee future results. Chart is for illustrative purposes only.
What this means for Investors
High yield municipals may offer favorable income and return potential. The picture can be even more attractive when one considers the taxable-equivalent yield advantage. What makes this opportunity so compelling, in our view, is that, from a credit standpoint, this is occurring at a time when municipal credit is generally as strong as it has been in decades.
For investors considering an allocation to municipal bonds or putting additional money to work in the asset class, it may be beneficial to consider an actively managed approach that incorporates high yield bonds.
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