Municipal Bond Yields Remain Attractive Amid Tax Considerations

Municipal bond ETFs, such as MMIT and MMIN, continue to offer high yields for investors seeking tax-free income. The municipal/Treasury ratio remains elevated, indicating attractive yields for investors in the 37% tax bracket. Despite recent selling pressure due to concerns over tax reform and Medicaid reimbursement, the outlook for munis is positive, with stable state ratings and lower volatility compared to other credits.

Municipal bond exchange-traded funds (ETFs) continue to present high yields for investors seeking tax-free income. The municipal/Treasury (M/T) ratio, which compares the yields of AAA-rated municipal bonds to those of U.S. Treasury bonds, remains elevated, indicating attractive yields for investors in the 37% tax bracket.

John Loffredo, co-head of MacKay Municipal Managers, which issues the $835 million NYLI MacKay Municipal Intermediate ETF (MMIT) and $485 million NLYI MacKay Municipal Insured ETF (MMIN), highlighted the current yields. MMIT has a current tax-free yield of 3.7%, and MMIN’s current yield is 4%, equating to 5.9% and 6.3%, respectively, for an investor in the 37% tax bracket [1].

Despite recent selling pressure due to concerns over tax reform and Medicaid reimbursement, the outlook for municipal bonds remains positive. Loffredo expects stable state ratings and lower volatility compared to other credits, such as corporate bonds or securitized vehicles, if the economy goes into a recession.

Congress is still working out the tax bill, aiming to pass it by the July 4 holiday. Loffredo does not expect the municipal tax status to change, and even if states need to take on Medicaid payments, it will not alter his outlook. Many states have built up rainy-day funds and can adjust if necessary, he said. States can’t run budget deficits and will likely raise taxes or lower expenses to keep budgets balanced [1].

Investors should consider municipal bond ETFs as a strategic component for minimizing tax liabilities on investment earnings. The primary attraction of municipal bonds lies in the potential for their interest income to be exempt from federal income taxes, which can significantly enhance an investor’s after-tax returns. This tax-exempt income can outweigh the typically lower pre-tax yields that municipal bonds offer compared to taxable bonds [2].

The value derived from tax-free income grows in direct proportion to an investor’s marginal tax rate. For instance, an investor in a 22% federal tax bracket would find a municipal bond offering a 4% tax-free yield more advantageous than a taxable bond yielding 5%, which would provide an after-tax yield of only 3.9% [2].

Investors should tailor their municipal bond ETF selection to their unique tax circumstances. National municipal bond ETFs hold a portfolio of bonds issued by various states, while single-state municipal bond ETFs are designed for residents of a particular state. The choice between these options depends on the investor’s state of residence and its prevailing tax regulations [2].

To accurately compare the attractiveness of tax-exempt municipal bonds with taxable bonds, investors must understand the concept of Tax-Equivalent Yield (TEY). TEY reveals what yield a taxable bond would need to offer to match the after-tax yield of a tax-free municipal bond, allowing for an “apples-to-apples” comparison [2].

In conclusion, municipal bond ETFs such as MMIT and MMIN continue to offer high yields for investors seeking tax-free income. Despite recent market pressures, the outlook for municipal bonds remains positive, with stable state ratings and lower volatility compared to other credits. Investors should consider these ETFs as a strategic component for minimizing tax liabilities on investment earnings.

References:
[1] https://www.etf.com/sections/news/muni-yields-remain-attractive-now
[2] https://gov.capital/top-tax-free-income-best-municipal-bond-etfs-for-savvy-investors-in-2025/