Muni Market’s Moment of Truth: Tax-Exemption in Question>
Fixed income markets are no fan of indecision or uncertainty. And here we are, mid-March, mired in a sea of uncertainty. Specifically, in the view of municipal investors, there are more reasons for concern now than in any other major market sector. The existential threat to the future of tax-exempt finance has heightened this uncertainty, making municipal bonds a focal point for policymakers and investors alike.
The Future of the Tax-Exemption Unanswered
Municipal investors are watching closely as discussions unfold in Washington, where both the House and Senate finance committees are weighing significant changes that could reshape tax-exempt finance. Some of the key questions on the table include:
- Will the benefit of the federal exemption be capped at 28% or eliminated entirely?
- Will the potential cap apply to all outstanding bonds or only those issued after a certain date?
- Could tax exemption for municipal bonds be legislated out of existence altogether?
At this moment, the outcome remains highly uncertain. However, the potential for an adverse resolution appears more serious than ever before. Advocacy efforts are already underway in Washington, with advisory groups representing both state and local bond issuers working to educate lawmakers on the costly implications of such legislative changes.
Market Uncertainty Presents a Unique Opportunity
While these uncertainties create challenges, they also present compelling opportunities for entities currently holding cash or equivalents. Recent shifts in the municipal bond market have resulted in more attractive yields, particularly in the 10- and 30-year segments.
According to Bank of America, these yields have now approached their most compelling levels in years. Despite concerns over potential federal taxation of municipal bond interest, several bank strategists highlight that the taxable-equivalent yield from municipal high-yield bonds currently offers a pickup of 30-40 basis points over various corporate high-yield alternatives.
High-Yield Munis Are Now at Their Most Compelling Levels
Source: ICE Data Service, March 2025. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
Superior Tax-Equivalent Yields vs. Corporate High-Yield Bonds
Source: ICE Data Service, March 2025. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index. The indices are unmanaged and are not securities in which an investment can be made. The chart displays the yield of the ICE Municipal Bond index on a tax-equivalent yield basis. ICE Core High Yield & Unrated Municipal Index (High Yield Munis), ICE BofA US High Yield Index (US High Yield), ICE BofA Euro High Yield Index (Euro High Yield), ICE BofA High Yield Emerging Markets Corporate Plus Index (Emerging Markets High Yield), ICE BofA Global High Yield Index (Global High Yield). See index descriptions at the end.
Why Now is the Time to Consider Municipals
Given the current market landscape, now may be an opportune time for allocations to municipal bonds—both in high-yield and investment-grade categories. The combination of higher ratios, strong taxable-equivalent yields, and the long-term stability of munis makes them a viable option for investors looking to optimize their portfolios in uncertain times.
While the fate of tax-exempt finance remains unclear, one thing is certain: those who navigate this period strategically could find themselves in a position of strength when the dust settles.
To receive more Municipal Bonds insights, sign up in our subscription center .
