Municipal bond investors may have a rare and compelling opportunity to lock in high yields.
High-grade municipal bond yields, particularly at the long end of the curve, are near their highest levels in over a decade, according to the Bloomberg Municipal Bond Index through May 8.
And the ratio of the tax-equivalent yield on 30-year AAA-rated munis vs U.S. Treasuries is currently sitting just above 90%, according to Bloomberg's Evaluated Pricing Service as of May 8.
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That means many muni bonds are practically offering tax exemption at little or no cost to investors.
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The combination of high outright yields at that ratio to Treasuries doesn’t happen very often — and when it does happen, it typically doesn’t last long.
The perfect storm: What drove munis to these levels
The reasons are technical in nature:
- Increased supply. Tax-exempt muni issuance in the first quarter of 2025 was 23% above the record pace set the previous year, according to Bloomberg through March 31, putting pressure on municipal yields.
- Treasury market volatility. In early April, the combination of high volatility in the Treasury market and moderate bond-to-equity rebalancing pushed rates for high-grade bonds up significantly at the long end of the curve.
Those headwinds have left munis relatively cheap compared to other fixed-income asset classes and have pushed their total yields up to a high-water mark.
However, as we head into summer, the typical seasonal patterns suggest that supply will decrease and demand will rise, driven by coupon and principal reinvestments.
Despite the recent technical pressures, muni credit quality remains intact at high levels. In recent years, state and local governments have applied excess fiscal stimulus wisely, building rainy-day funds and buffers for turbulent conditions.
Moreover, we expect municipal revenue sources to be largely insulated from any direct impact from tariffs.
In short, we’ll soon be entering a traditionally strong period for munis, with the added appeal of exceptionally cheap valuations and solid credit fundamentals.
Long-dated high-grade munis have become especially attractive of late. The chart below highlights the excess tax-equivalent yields that munis are offering vs Treasuries in the long end of the curve.
This differential has grown significantly since the end of last year. Not only are these opportunities rare, but they are also short-lived.
The investment case in brief
Munis are in good position to deliver strong returns this year, with tax-equivalent yields close to 7% on an after-tax basis, and provide a ballast in the event of an economic downturn, according to the Bloomberg Municipal Bond Index yield and Vanguard calculations as of May 8. (The municipal tax-equivalent yield is calculated using a 40.8% tax bracket, which includes a 37% top federal marginal income tax rate and the 3.8% net investment income tax to fund Medicare.)
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Given the current yields, valuations and technical tailwinds, longer-dated high-grade munis represent a sweet spot in the market.
Conditions are likely to shift in the coming months, so investors may want to consider seizing this investment opportunity before it’s gone. And remember that all investing is subject to risk, including possible loss of principal. (Read another timely take on muni bonds in the article Financial Analyst Sees a Bright Present for Municipal Bond Investors.)
If you’re considering investing in munis, you should be aware that although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal alternative minimum tax.
Also, bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
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