Muni debt poised for strong year as higher yields lure investors

Higher municipal-bond yields are spurring a buying opportunity for investors looking for relative value against taxable fixed-income securities. 

The state and local-government debt market is poised for another strong year in terms of issuance and demand from retail buyers, provided federal lawmakers maintain the bonds’ tax-exempt status, according to investors and bankers who took part in a Bloomberg panel discussion on Thursday. Ten-year benchmark muni yields jumped to 3.28% earlier this month, the highest since November 2023. 

“On an absolute yield basis after-tax, munis are more attractive than every other fixed income asset class,” Rachel Betton, managing director at JPMorgan Asset Management, said at the event. “People are going to continue putting money into munis, assuming they’re tax-exempt.” 

The muni-bond tax exemption is the defining feature of the $4 trillion asset class. It allows states, cities, school districts and other entities to lower borrowing costs because the interest investors earn on their holdings is generally free from federal and state income taxes. That makes the securities valuable, especially to buyers in jurisdictions with higher levies. 

For example, a bond issued earlier this month by the Triborough Bridge & Tunnel Authority priced with a yield of 3.39%, according to data compiled by Bloomberg. On an after-tax basis, a New York-based investor in the top bracket would need to purchase a taxable bond with a 7.63% yield to see the same value, according to a calculator from Eaton Vance. 

“Munis are pretty attractive no matter how you look at it,” said Todd Bleakney, head of municipal finance at Truist Securities. 

The muni tax break — estimated to cost the US government less than $40 billion each year — may be discussed as a possible source of revenue to offset tax cuts backed by President Donald Trump. A 51-page document released by the House Ways and Means Committee last week included the elimination among a list of potential revenue-raising measures. 

The panelists said they had muted concerns over a revocation of the exemption. When asked to rank their panic on a scale of one to 10, those who committed to a number said two or three at the highest. 

“We’re bond people, we like to worry about things, but I’m not terribly concerned,” said Betton. 

Beth Coolidge, head of public finance at Oppenheimer, said that there’s a coordinated effort from the market to educate lawmakers on the importance of the exemption. 

“That’s something we as an industry should have been doing from day one,” she said on the panel. “Any time there’s a new Congress, we should feel that level of urgency to educate these new members about the importance of what we do, the importance of the tax exemption.” 

Money manager John Miller of First Eagle Investments said he’s scouring primary and secondary markets for overlooked opportunities. 

“On the primary market, we’re negotiating private placements that are a little bit more off the run,” he said. “The supply does create opportunities on the secondary because people often want to sell those lower embedded yield bonds, or sell the bonds that maybe have disappointed.”