Looking for more yield? Munis yields are still going strong

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Looking for more yield? Munis yields are still going strong

Vanguard Perspective


November 20, 2023

If you’ve been looking for a way to help clients in higher tax brackets, now’s the time to tell them about an attractive opportunity in municipal bonds. Tax-equivalent yields on municipal bonds are above 7%, among the highest levels we’ve seen over the past decade.

Muni tax-equivalent yields stand tall

Chart showing tax-equivalent yield-to-worst data for five categories of bonds, represented by Bloomberg indexes. Tax-equivalent yields are higher for municipal bonds than for the U.S. Aggregate Bond, U.S. Treasury, U.S. Mortgage-Backed Securities, and U.S. Corporate Indexes as of February 28, 2023.

Source: Bloomberg indices, using yield-to-worst data as of September 30, 2023.

Note: The municipal tax-equivalent yield is calculated using a 40.8% tax bracket, which includes a 37.0% top federal marginal income tax rate and a 3.8% Net Investment Income Tax to fund Medicare.

Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

As an asset class, munis are rated AA–, indicating a greater degree of safety from default risks compared with lower-rated sectors such as investment-grade credit.

While recession forecasts entail risks for many markets, municipal balance sheets are flush with reserves following pandemic-era stimulus, and they should remain healthy even if an economic downturn should unfold.

Given this unique combination, your high-tax-bracket clients should strongly consider increasing their municipal bond allocations.

Help your clients reach their goals with municipal bonds

You can create a plan to help your clients potentially generate tax-exempt income and enhance total returns, while being careful to avoid compromising tax efficiency or portfolio stability.

Here are three key benefits for your clients when investing in Vanguard municipal funds:

1) Strong fundamentals. Buoyed by COVID-era stimulus funds and rising property and wage taxes, many municipalities have set aside money for rainy-day funds and pension obligations. This provides a buffer for municipal bond investors against potential falling tax revenue in a recession.

2) Higher yields relative to other asset classes and to historical norms. Corporate debt yields are about 6%, and their average credit rating is only BBB+, compared with AA– for munis, according to Bloomberg. The volatility that whipsawed municipal securities last year led to bargain valuations, especially at the longer end of the yield curve. Our portfolio managers have also uncovered compelling value in municipal bonds rated A and BBB. We anticipate that these purchases will contribute to outperformance for the next few years.

3) Decades of fund management experience. You and your clients can count on us to leverage our scale and decades of experience managing municipal funds, both active and passive, to generate stronger long-term outcomes:

  • We have a lower hurdle to outperformance, driven by our overall lower costs compared with average competitors’ fees.1 This competitive advantage allows our fund managers to approach risk patiently and prudently and reduce volatility while still achieving top quartile returns relative to our average peers for the 5-and 10-year periods.2
  • We have more than 40 portfolio managers, credit analysts, and traders who are completely dedicated to munis, giving us ample resources to carefully analyze a particularly vast, fragmented universe of securities and issuers.
  • As the largest manager of municipal bonds,3 Vanguard‘s scale enables us to trade at attractive prices to minimize the effect of transaction costs on fund performance and help put more returns in your clients’ pockets.
  • It’s all about credit quality. Each of our active national funds is limited to only 5% of its bonds rated below investment grade, except for Vanguard High-Yield Tax-Exempt Fund.

You’ll find our national tax-exempt funds hold thousands of bonds across sectors, providing significant diversification.

1 Vanguard calculations using Morningstar, Inc., data. Vanguard’s average asset-weighted expense ratio was 0.08% on December 31, 2022, and the industry average asset-weighted expense ratio, excluding Vanguard, was 0.47%.

2 For the five-year period, 12 of 12 municipal fixed income funds exhibited top-quartile performance relative to peer funds in their Lipper categories. For the 10-year period, 12 of 12 municipal fixed income funds exhibited top-quartile performance relative to peer funds in their Lipper categories. Results will vary for other time periods. Only funds with a five-, or 10-year history, respectively, were included in the comparison. Data as of Sept. 30, 2023. Source: Refinitiv. Note the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks.

3 Morningstar, as of December 31, 2022.



  • For more information about Vanguard funds, call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • Past performance is no guarantee of future results. All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.
  • Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
  • Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
  • Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • “Bloomberg®” and Bloomberg Indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Vanguard. Bloomberg is not affiliated with Vanguard, and Bloomberg does not approve, endorse, review, or recommend Vanguard products. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Vanguard products.

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