Muni Market’s Moment of Truth: Tax-Exemption in Question
March 25, 2025
Read Time 3 MIN
Fixed income markets are no fan of indecision or uncertainty. And here we are, mid-March, mired in a sea of uncertainty. Specifically, in the view of municipal investors, there are more reasons for concern now than in any other major market sector. The existential threat to the future of tax-exempt finance has heightened this uncertainty, making municipal bonds a focal point for policymakers and investors alike.
The Future of the Tax-Exemption Unanswered
Municipal investors are watching closely as discussions unfold in Washington, where both the House and Senate finance committees are weighing significant changes that could reshape tax-exempt finance. Some of the key questions on the table include:
- Will the benefit of the federal exemption be capped at 28% or eliminated entirely?
- Will the potential cap apply to all outstanding bonds or only those issued after a certain date?
- Could tax exemption for municipal bonds be legislated out of existence altogether?
At this moment, the outcome remains highly uncertain. However, the potential for an adverse resolution appears more serious than ever before. Advocacy efforts are already underway in Washington, with advisory groups representing both state and local bond issuers working to educate lawmakers on the costly implications of such legislative changes.
Market Uncertainty Presents a Unique Opportunity
While these uncertainties create challenges, they also present compelling opportunities for entities currently holding cash or equivalents. Recent shifts in the municipal bond market have resulted in more attractive yields, particularly in the 10- and 30-year segments.
According to Bank of America, these yields have now approached their most compelling levels in years. Despite concerns over potential federal taxation of municipal bond interest, several bank strategists highlight that the taxable-equivalent yield from municipal high-yield bonds currently offers a pickup of 30-40 basis points over various corporate high-yield alternatives.
High-Yield Munis Are Now at Their Most Compelling Levels
Source: ICE Data Service, March 2025. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.
Superior Tax-Equivalent Yields vs. Corporate High-Yield Bonds
Source: ICE Data Service, March 2025. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index. The indices are unmanaged and are not securities in which an investment can be made. The chart displays the yield of the ICE Municipal Bond index on a tax-equivalent yield basis. ICE Core High Yield & Unrated Municipal Index (High Yield Munis), ICE BofA US High Yield Index (US High Yield), ICE BofA Euro High Yield Index (Euro High Yield), ICE BofA High Yield Emerging Markets Corporate Plus Index (Emerging Markets High Yield), ICE BofA Global High Yield Index (Global High Yield). See index descriptions at the end.
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Why Now is the Time to Consider Municipals
Given the current market landscape, now may be an opportune time for allocations to municipal bonds—both in high-yield and investment-grade categories. The combination of higher ratios, strong taxable-equivalent yields, and the long-term stability of munis makes them a viable option for investors looking to optimize their portfolios in uncertain times.
While the fate of tax-exempt finance remains unclear, one thing is certain: those who navigate this period strategically could find themselves in a position of strength when the dust settles.
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Important Disclosures
Index Definitions
ICE Core High Yield & Unrated Municipal Index - Tracks the performance of U.S. dollar-denominated, non-investment grade and unrated, fixed-rate, tax-exempt municipal bonds, including general obligation, revenue, insured, and pre-refunded bonds.
ICE BofA U.S. High Yield Index - Measures the performance of U.S. dollar-denominated, below investment-grade corporate debt publicly issued in the U.S. market. Eligible bonds must be below investment-grade, have at least one year to maturity, a fixed coupon, and a minimum outstanding amount of $100 million.
ICE BofA Euro High Yield Index - Tracks the performance of euro-denominated, below investment-grade corporate debt issued in the eurobond, sterling domestic, or euro domestic markets. Eligible bonds must be below investment-grade, have at least one year to maturity, a fixed coupon, and a minimum outstanding amount of €250 million or £100 million.
ICE BofA High Yield Emerging Markets Corporate Plus Index - Measures the performance of U.S. dollar-denominated, below investment-grade corporate debt from emerging markets. Eligible bonds must be below investment-grade, have at least one year to maturity, a fixed coupon, and a minimum outstanding amount of $100 million.
ICE BofA Global High Yield Index - Tracks the performance of below investment-grade corporate debt publicly issued in major domestic or eurobond markets. Eligible bonds must be below investment-grade, have at least one year to maturity, a fixed coupon, and a minimum outstanding amount of $100 million (U.S. market) or €100 million (eurobond market).
Definitions
Taxable-Equivalent Yield - The yield a taxable bond must earn to match–after federal taxes–the yield available on a tax-exempt municipal bond (excluding AMT).
Yield to Worst - Measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.
Please note that VanEck may offer investment products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Associates Corporation.
Related Funds
Important Disclosures
Index Definitions
ICE Core High Yield & Unrated Municipal Index - Tracks the performance of U.S. dollar-denominated, non-investment grade and unrated, fixed-rate, tax-exempt municipal bonds, including general obligation, revenue, insured, and pre-refunded bonds.
ICE BofA U.S. High Yield Index - Measures the performance of U.S. dollar-denominated, below investment-grade corporate debt publicly issued in the U.S. market. Eligible bonds must be below investment-grade, have at least one year to maturity, a fixed coupon, and a minimum outstanding amount of $100 million.
ICE BofA Euro High Yield Index - Tracks the performance of euro-denominated, below investment-grade corporate debt issued in the eurobond, sterling domestic, or euro domestic markets. Eligible bonds must be below investment-grade, have at least one year to maturity, a fixed coupon, and a minimum outstanding amount of €250 million or £100 million.
ICE BofA High Yield Emerging Markets Corporate Plus Index - Measures the performance of U.S. dollar-denominated, below investment-grade corporate debt from emerging markets. Eligible bonds must be below investment-grade, have at least one year to maturity, a fixed coupon, and a minimum outstanding amount of $100 million.
ICE BofA Global High Yield Index - Tracks the performance of below investment-grade corporate debt publicly issued in major domestic or eurobond markets. Eligible bonds must be below investment-grade, have at least one year to maturity, a fixed coupon, and a minimum outstanding amount of $100 million (U.S. market) or €100 million (eurobond market).
Definitions
Taxable-Equivalent Yield - The yield a taxable bond must earn to match–after federal taxes–the yield available on a tax-exempt municipal bond (excluding AMT).
Yield to Worst - Measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.
Please note that VanEck may offer investment products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that municipal bonds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. When interest rates rise, bond prices fall.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Associates Corporation.