When the Tax Equivalent Yield Outpaces Cash

The municipal market offers historically high tax-free income?

• Municipal-to-Treasury yield ratios have been rising, making munis more attractive?
• The tax-adjusted yield for munis is in the mid-5% range ?
• Yields for munis are attractive vs. money markets and offer some upside if rates are peaking?

A historic rise in municipal bond yields offers high-net-worth investors with an excellent opportunity to capture tax-free income in an asset class that has solid credit fundamentals. Valuations for municipal bonds are also attractive relative to taxable alternatives.

Looking at historic yields going back 20 years, municipal 2-year yields are being offered at levels not seen since 2007.

Furthermore, a softer technical environment has repriced the municipal-to-Treasury ratio (M/T ratio) to its highest level in almost a year.

What does this mean for investors in the 35% tax bracket? When compared to taxable fixed income alternatives, municipal bonds are offering a taxable equivalent yield of?5.62%. The yield increases for investors who purchase in-state bonds; for the average state income tax rate of 5%, the taxable equivalent yield increases to?6.09%.

During the most recent rate cycle, money market funds have experienced significant inflows due to their defensive nature and attractive yield levels. With municipal money market funds (MMMF) currently offering yields in the low-to-high 3.00% range, investors should consider extending the maturity structure of their municipal bond holdings. Although MMMF seems attractive now, yields are highly responsive to Fed policy and current market conditions. If the market anticipates an economic slowdown or recession, money market yields will quickly adjust lower to reflect the new market environment. However, investors who own longer-dated maturities will continue to receive above-market yields as well as enjoy principal appreciation on those bonds.?

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