MW Municipal bonds are now a bargain thanks to Trump's tariff turmoil

By Brett Arends

Munis are paying interest rates that are irrationally generous

I'm going out on a limb here, but I'm willing to bet that needlessly paying higher taxes isn't about to come into fashion.

And unless it does, municipal bonds look like an easy one-way bet.

Tax-favored munis have plummeted in price during the recent market turmoil, falling much further than the equivalent taxable bonds issued by the U.S. Treasury.

It's left munis paying interest rates that are irrationally generous once you factor in their tax advantages.

"Municipal bonds are offering rare value right now - they're trading like risk assets, but delivering tax-free income that often beats Treasurys on a taxable-equivalent basis," says Larry Glazer, managing partner at Mayflower Advisors in Boston. "It's a moment for smart, opportunistic investors to lean in. It's not often that municipal bonds get mispriced like this. They've been hit by inflation fears, liquidity pressures and a wave of supply - but for long-term investors, that spells opportunity, not risk."

Bonds work like seesaws: When the price falls, the yield or effective interest rate rises.

Consider: The benchmark 10-year U.S. Treasury note BX:TMUBMUSD10Y is currently yielding 4.3%, on which the owner must pay ordinary income tax (unless you own it in a shelter, like an IRA).

Meanwhile, the Bloomberg index of 10-year municipals is yielding 3.96%, on which the owner does not typically need to pay any federal income tax (though the alternative minimum tax can be a complication in some instances for a few bonds). The equivalent index of 10-year "general obligation" municipals - which are backed by the full faith and credit of the state, city or town issuing them - is yielding 3.86%.

How good is that? Do the math. The marginal buyer of munis is a top-rate taxpayer, and the top rate of federal income tax right now is 37%. For someone in that tax bracket, 3.86% free of income tax is the equivalent of earning 6.13% on a taxable bond.

And we're not even counting the additional tax benefits of avoiding state and local taxes, if you buy the relevant municipals issued within your state or city.

As of Thursday, April 24, you could find individual tax-free municipal bonds rated A-grade or better paying 3.8% for one year, 4.6% for five years and 5% for 10 years. That works out to around 6%, 7.3% and 8%, respectively, on a taxable-equivalent basis for someone paying the top rate of income tax - even ignoring any state and city tax benefits.

Cooper Howard, fixed-income strategist at Charles Schwab, says the turmoil caused earlier this month by President Trump's "liberation day" tariffs resulted in the biggest three-day slump in 10-year municipal bonds since the COVID crash. The reason, he explains in a new article, is that the municipal bond market is smaller and less liquid than the equivalent markets for Treasurys and corporate bonds. As a result, even small amounts of selling pressure can produce outsize falls in price.

"The selloff has created an opportunity, in our view," Howard writes. "The yield-to-worst (the lowest yield that an investor can receive on a bond with a call option, barring default) for the Bloomberg Municipal Bond Index is close to 4.2% which is the equivalent of an over 8% taxable yield for an investor in a high-tax state like New York and California."

The iShares National Muni Bond ETF MUB currently sports a yield of 3.8%, the Invesco National AMT-Free Municipal Bond ETF PZA yields 4.1% and the Vanguard Municipal Money Market Fund yields 4%.

You don't need to be a top-rate taxpayer to benefit from this. If you assume that top-rate taxpayers will sooner or later wake up to this opportunity and bid up the price of municipal bonds, the rest of us could figure that if we buy now, we can sell to them later at a higher price.

Those who really want to take a tactical bet on munis can also take a look at closed-end municipal bond funds. They may offer a double or even triple play if the muni market rebounds.

Closed-ends are regulated mutual funds, like traditional mutual funds and exchange-traded funds, except that they only issue a fixed number of shares, which then trade on the stock market. One of their key features is that, as a result of their structure, their share prices can sometimes sell for significantly less than the underlying value of their assets. Another is that many of these funds use leverage, borrowing short-term and using the money to buy long-term bonds.

If munis rebound, the underlying assets of closed-end muni funds should, logically, rise with the market. But in the turmoil of recent weeks, many fund shares have fallen by even more than their underlying net assets - and if the market turns around, you would expect that to reverse. That would be a second win for investors.

Meanwhile, if the turmoil unleashed by the administration in recent weeks has successfully engineered an economic slowdown or even a recession, sooner or later the Federal Reserve is going to start cutting short-term interest rates. And that will give a third benefit to all those funds that use leverage and borrow at short-term rates.

But these are options for those looking to trade. For normal people, including those who just want an easy life and lower taxes, just buying individual municipal bonds, or regular mutual funds or exchange-traded funds, offers a lot of advantages right now.

-Brett Arends

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April 25, 2025 07:00 ET (11:00 GMT)

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