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LABJ Stock Index: November 27

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A Rare Municipal Bond Opportunity

What if we told you that currently, top U.S. taxpayers can get equity-like yields (after tax considerations) by investing in municipal bonds? Even if you’re not in a high-tax state, municipal bonds are currently a potentially attractive – and rare – opportunity.


The case for municipal bonds is also strong when you adjust for the risk. The municipal bond market has a history of extremely low defaults. Within the fixed income universe, municipals at current levels offer compelling relative value to comparable lower-risk bonds.

Here’s more on why.

• Municipal bonds’ compelling yields

In recent weeks, New York and Texas issued headline-worthy municipal bonds: 5% yields, tax-free. Interest rate hikes, and the rise in longer-dated bond yields, have created this compelling situation.

• Municipals have extremely low default risk

Since 2017, municipal bond defaults have averaged 0.14% annually. In 2017, Puerto Rico defaulted (it was the biggest municipal bond default in history) but even then, the annual default rate for the market as a whole was only 0.70%.

• State and local debt stock has not grown

States’ median rainy-day fund balances have surged to 12% of general fund spending, thanks to Covid-era federal policies that saw the federal government borrow and distribute funds to citizens and municipalities.

• Munis offer more value relative to bonds with similar risks

In the search for yield, municipal bonds shine relative to similar, lower risk fixed income such as treasuries, as well as investment grade bonds. Currently, tax-free municipal bonds yield 75% as much as (federally taxable) treasury bonds. While it’s not the best it’s ever been, we don’t expect that ratio to return to historic norm, as the most likely cure for the ballooning federal deficit is higher taxes, which will only serve to further raise the attractiveness of munis. Also important to note, the Tax Cuts and Jobs Act, which lowered taxes for millions of Americans, is set to sunset in 2025.

Municipal yields also compare favorably with investment grade bonds. Munis offer about 65% of the average investment grade bond’s yield compared to an average of 50% over the last five years. Ahead, we expect a reversion to historic averages.

An unusually compelling opportunity

The bottom line? We believe this is the most compelling opportunity for municipal bond investors in 15 years. As an attractive yield meets an extremely low default risk, investors have an unusual opportunity to reach their financial goals with less risk.

Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
r.barragan@jpmorgan.com | (310) 860-3658

Source: J.P. Morgan Private Bank Insights, November 14, 2023. “A rare municipal bond opportunity: Equity-like yields” By Thomas V. Kennedy, Chief Investment Strategist, J.P. Morgan Private Bank.

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