For over a decade, fixed-income investors navigated a barren yield environment shaped by an era of relentless monetary intervention.
The Federal Reserve’s prolonged near-zero interest rate policy and aggressive bond-buying programs — designed to resuscitate economic growth — effectively suppressed yields, leaving investors starved for cash flows.
However, the bond market landscape has changed significantly, giving investors new opportunities to generate meaningful income. We see this clearly in the municipal bond market.
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Investment-grade municipal bonds are providing notably attractive taxable-equivalent yields for investors in high tax brackets, and sharp fund outflows in early April, resulting from the recent trade policy shocks and tax season, have created an even brighter entry point for investors.
Liberation Day and market reaction
Even before municipal rates increased abruptly in April, investment-grade municipal bond yields appeared attractive. As of March 31, the Bloomberg Municipal Bond Index’s 6.50% taxable-equivalent yield for top taxpayers had been surpassed only 3% of the time over the past 15 years.
Additionally, real yields, or yields after adjusting for inflation, rivaled levels not seen since 2013 and were strongly positive, in contrast to the negative real yields seen in 2021 and 2022.
Source: As of 3/31/25. Bloomberg Municipal Bond Index yield to worst; for taxable-equivalent yield, assuming a top tax bracket of: 40.8% (37% plus 3.8% investment income tax) for 2018-2025, 43.4% (39.6% plus 3.8%) for 2013-2017 and 35% for 2010-2012
(Image credit: Courtesy of Peter Aloisi)
The market sell-off after the tariff threat announced on April 2, which President Trump called Liberation Day, has only increased the attractiveness of this opportunity.
Following the tariff threat and the resulting global market turmoil, municipal funds experienced significant outflows, the most seen in several years, which sent yields for high-quality municipal issuers soaring by nearly 100 basis points in just three days, mirroring moves seen during the onset of the COVID pandemic in early 2020.
The timing also coincided with tax payment season, when municipal funds have witnessed outflows in the past.
The combination of these factors has created an excellent opportunity for investors to lock in high levels of tax-exempt income at a time when the credit fundamentals of municipal issuers remain broadly strong. The index taxable-equivalent yield climbed to 6.86% as of May 14.
Municipal bond relative value: An even greater opportunity
While the historic appeal of municipal yields is evident, our relative value analysis demonstrates a compelling case for municipals.
One relevant valuation measure shown in the chart below is the municipal/Treasury yield ratio, which helps assess the value of municipals relative to taxable fixed-income bonds.
The 10-year AAA municipal/Treasury yield ratio has averaged 67% over the last two years but rose well above this average during the last month%, driven by the recent municipal fund outflows. A higher ratio indicates increased relative value for municipal bonds.
While the ratio has started to decline, normalizing from the dislocated peak seen in April, at 74% it is still particularly attractive compared to the average over the last two years.
Source: Bloomberg, AMPWP as of 5/14/25
(Image credit: Courtesy of Peter Aloisi)
Another traditional valuation metric to consider compares municipals vs equities, using the taxable-equivalent yield of municipal bonds in relation to the stock market’s earnings yield.
The current earnings yield of the S&P 500 Index is about 4.5%, based off the forward price-to-earnings ratio at roughly 22 (investors are essentially paying $22 for every $1 of corporate earnings, resulting in an earnings yield of 4.5% ($1 divided by $22)).
Due to the extended period of low interest rates over the past 15 years, it has been uncommon for municipal bond taxable-equivalent yields to exceed the earnings yield of the S&P 500 Index.
The chart below illustrates that, until recently, the last time municipal bonds had a valuation advantage over equities this significant was in 2002.
Source: As of 5/14/25. Bloomberg Municipal Bond Index yield to worst; for taxable-equivalent yield assuming a top federal tax bracket of: 40.8% (37% plus 3.8% investment income tax) for 2018-2025, 43.4% (39.6% plus 3.8%) for 2013-2017, 35% for 2003-2012 and 38.6% for 2002; earnings yield based on Bloomberg forward price-to-earnings multiple based on earnings estimates for the next four quarters.
(Image credit: Courtesy of Peter Aloisi)
Conclusion
Municipal bond instruments, no longer hampered by suppressed yields, offer high-tax-bracket investors an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
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Municipal bonds present a compelling value proposition with taxable-equivalent yields near 7%, outpacing inflation and rivaling equities on a risk-adjusted basis.
While economic and policy uncertainties persist, the convergence of rising real yields and sound credit fundamentals suggests that municipal bonds should be a strategic cornerstone in portfolio construction to provide tax-advantaged income and wealth preservation.
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The information contained in this article reflects A&M’s views as of the date of this publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. A&M has obtained the information from various third-party sources believed to be reliable, but such information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. A&M is not responsible for the consequences of any decisions or actions taken as a result of information provided in this newsletter and does not warrant or guarantee the accuracy or completeness of this information.
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