Municipal Bonds, Powered by Tax-Exemption, Earn Renewed Appeal

The high-quality nature of the municipal asset class often has investors overlooking munis for more volatile asset classes with higher return potential. As fixed income yields have reached near-decade highs, and as higher taxable fixed income rates, along with higher tax rates, have led to potentially larger tax implications associated with fixed income investing, we believe it is time to take a closer look at after-tax return potential afforded by the tax-exempt asset class.

Why Bonds? Fixed Income, Again Offering Income

For the first time in a long time, fixed income is paying investors to diversify their asset allocations from more volatile asset classes. Yields have reached highs not seen in many years as central banks around the world raised interest rates over the past 18 months. With the U.S. Federal Reserve’s most recent decision on June 15 to forgo another rate hike, the fed funds rate remains at 5.00%-5.25%, up 5.00% from the start of 2022; it now stands at the highest level since September 2007, resulting in higher levels of income across the curve.

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Why Munis? Above Average After-Tax Return Potential, with Downside Protection

As investors consider the long-term benefits of fixed income, munis shouldn’t be ignored in the conversation

The power of tax-exempt income can provide for after-tax return advantages. Considering a top effective marginal tax rate of 40.8%, which includes the top federal bracket of 37%, as well as a Medicare surcharge of 3.8%, this is almost half of the income generated by a taxable fixed income investment.