For over 200 years, municipal bonds or "munis," which are debt securities issued by states and local governments, have funded American projects such as schools, utilities, and more. The interest paid on munis is generally exempt from federal taxes and sometimes from state and local taxes, too. Munis are off to a rocky start in 2025. The Bloomberg Municipal Bond Index returned -0.6% vs. 3.0% for the Bloomberg U.S. Aggregate Index year to date through June 20, 2025.

The decline wasn't driven by deteriorating conditions for local governments, but rather by technical pressures. Fears about changes in tax-exempt status for munis sparked a retail exodus, causing forced sales in a market already adjusting to higher issuance from local governments who were trying to get ahead of tariff-related economic uncertainty.

While concerns about munis' tax-exempt status are not new, institutions like Capital Group¹, Nuveen² , among others, are not convinced that munis might lose their tax-exempt status. Even in the worst-case scenario, existing tax-exempt bonds would be grandfathered into the current rules, and that would make them more attractive for investors going forward.

For investors in a high tax bracket, here are three reasons why munis remain attractive.

Why Munis Remain Attractive for Investors

For investors in a high tax bracket, here are three reasons why munis remain attractive.

1. Compelling Yields

Muni yields have increased to new highs in recent years. For investors in the highest tax bracket, current yields can be more compelling after taxes. This is because the Bloomberg Muni Index 4.0% tax-free yield is equivalent to earning 6.3% on a taxable investment, which is much higher than the taxable equivalent of the Bloomberg US Aggregates 4.7% yield³. For investors in high-tax states like California and New York, the opportunity could be even more compelling.

Municipal Bond Yields Climb Above 10-Year Average

Source: Bloomberg, FRED. Data as of 12/31/2015-06/20/2025.
*Calculated based on a 37% federal income tax bracket.

2. Steady State, Local Finances

While federal debt has ballooned and is expected to continue rising over the next 10 years, state and local debts have held steady. Unlike the federal government, many states require their legislatures to pass balanced budgets.

Percent of GDP, 1966-2024

Source: Bloomberg, FRED, National Association of State Budget Officers (NASBO)

In addition, many municipalities came through the pandemic with strong balance sheets thanks to billions of dollars in federal aid, helping to build their rainy day funds to record highs. Lastly, even during recessions, consumers may give up going on vacation, but they will still keep their essential services like water and sewer. This explains why, in past recessions, the muni market has not historically experienced a spike in defaults due to the prevalence of essential service monopolies.

3. Munis Can Help Diversification

Muni bonds are domestically focused and are less tied to geopolitical and other global risks, and thus could provide diversification relative to stocks and other bonds in portfolios.

Key Takeaways

• Concerns over losing tax-exempt status and technical pressures led municipals lower in 2025.

• Despite headline risk, compelling yields, steady state, and local finances, and diversification benefits reinforce the appeal for tax-aware investors.

Conclusion

In investing, there is an old adage: "It's not what you earn, but what you keep". This perfectly captures how munis can help maximize after-tax returns for high-income earners. While headline risks over potential tax-exempt status will continue to dominate, compelling yields, strong fundamentals, and historical resilience create an attractive potential for munis. Investors should consult with their financial advisor and tax professional to understand if munis are suitable for their specific financial situation and goals.

If you have questions, we're here to help. Contact us today.

¹ https://www.capitalgroup.com/advisor/investments/fixed-income/perspectives/volatility-hits-munis.html
² https://documents.nuveen.com/Documents/Nuveen/Default.aspx?uniqueid=3cbce446-92ed-4703-80aa-0cbf80e4e1ca
³ Yield to Worst. Data as of 6/20/2025

Michael Embrescia is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. ​Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.

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8118516.1 | 07/2025 | EXP 07/31/2027