Munis or Treasurys? It’s not so simple anymore.

For much of the past decade, the choice between municipal bonds and Treasuries was relatively easy for wealthy, taxable investors. Treasury yields were low, while municipal bonds frequently offered compelling yields even before accounting for their exemption from federal income tax. But things have changed; slowly then all at once.

Treasury yields are now higher than they have been for much of the post-GFC period. The 10-year Treasury yields approximately 5.1%, while the 10-year AAA municipal yield is roughly 3.7%. At the same time, the AAA muni/Treasury ratio, which is a quick measure of relative value in the municipal market, has fallen to approximately 73%.¹

All of a sudden, the axiomatic decision to own municipal bonds as the default choice for taxable fixed income is no longer pat. We have to seriously ask if munis are still worth owning.

The quick answer is yes, but we really need to unpack that, because it’s much more nuanced than it used to be, and frankly, the analysis is more complex. For investors in the highest federal tax brackets, municipal bonds still offer a meaningful after-tax advantage. For investors in lower brackets, today’s Treasury yields can be difficult to beat. And for investors choosing between national and single-state municipal portfolios, the value of the state-tax exemption varies enormously (and requires a consideration of individual circumstances and a keen credit lens).

The muni advantage has narrowed

The standard measure of municipal relative value is straightforward: divide the yield on a 10-year AAA municipal bond by the yield on a 10-year Treasury. Today that ratio is approximately 73%.

Let’s put that in context: this is quite different from much of the period following the GFC. From 2008 through 2016, the ratio frequently approached or exceeded 100%, meaning tax-exempt municipal bonds sometimes yielded as much as, or more than, taxable Treasuries. Those unusually high yields reflected liquidity, credit and structural risks in the municipal market, but they nevertheless created an extraordinary after-tax opportunity for taxable investors.²

Things started to change. Since 2021, the market has behaved differently. The ratio has generally ranged between approximately 54% and 81%, much closer to the level implied by the tax value of municipal income to high-bracket investors.

Chart 1

10-Year AAA Muni/Treasury Ratio, 2001–2026

10-year AAA municipal yield as a percentage of the 10-year Treasury yield, weekly, January 2001–October 20, 2026

The shaded band marks September 2008–December 2016. The dashed line is 59.2%, the ratio at which a 10-year AAA municipal bond and a 10-year Treasury yield the same after tax for an investor at the 37% federal rate plus the 3.8% Net Investment Income Tax. The March 2020 peak of 365% is clipped at 200% for legibility. Source: Bloomberg (MUNSMT10 Index); Belvest Family Wealth calculations.

This is an important change. Municipal bonds have not become unattractive. In fact, relative to equities, they may have become more attractive. But they are no longer the only game in town and the enormous relative-value cushion investors enjoyed after the financial crisis has largely disappeared.

For high income people, munis are still useful

At today’s yields, the basic tax math is simple, if you have a lot of income and pay a lot of taxes.

The 10-year AAA municipal yield is approximately 3.74%, compared with approximately 5.11% for the 10-year Treasury. For a top-bracket investor subject to the 37% federal rate and the 3.8% Net Investment Income Tax, the Treasury’s after-tax yield falls to approximately 3.02%. The municipal bond remains at 3.74%. Ergo, the muni investor is ahead by approximately 72 basis points per year.

But, the advantage diminishes rapidly as tax rates fall.

Table 1

After-Tax Treasury Yield vs. AAA Municipal Yield

10-year maturities, by federal marginal rate

Federal tax rate	Treasury after tax	AAA muni	Muni advantage
24%	3.88%	3.74%	−14 bp
24% + NIIT	3.69%	3.74%	+5 bp
32% + NIIT	3.28%	3.74%	+46 bp
35% + NIIT	3.13%	3.74%	+61 bp
37% + NIIT	3.02%	3.74%	+72 bp

Based on a 5.11% 10-year Treasury and a 3.74% 10-year AAA municipal yield as of October 20, 2026. NIIT is the 3.8% Net Investment Income Tax, which applies to Treasury interest but not to municipal interest. State taxes are excluded from this simplified federal comparison because Treasury interest is exempt from state income tax. Source: Bloomberg; Belvest Family Wealth calculations.

The upshot is simple: for higher tax brackets, munis make sense. Conversely, at 24% without the NIIT, Treasuries currently offer the higher after-tax yield. Around the middle, the decision becomes much more complex. And that’s why today’s higher Treasury yields matter: tax exemption alone is no longer sufficient to make munis the IBM of the fixed income world.

Implementation matters

Our chart is informative, but it is stylized in a sense: the AAA curve is a useful benchmark, but it isn’t a portfolio.

Meaning, most municipal portfolios contain a lot of AA and A-rated bonds, along with callable securities and other structures that offer additional yield. That means the yields available in real-world municipal portfolios are considerably higher relative to comparable Treasury portfolios than the 73% AAA ratio suggests.

For example, Vanguard’s Intermediate-Term Tax-Exempt Fund recently yielded 4.27%, compared with 4.92% for its Intermediate-Term Treasury Fund.³

For a top-bracket investor, that Treasury yield falls to roughly 2.91% after federal tax and NIIT, compared with 4.27% tax-free for the municipal fund, which is a difference of approximately 136 basis points.

But, again, there are nuances.

The municipal fund has a number of risks that Treasuries don’t. For example, it has somewhat greater duration, meaningful exposure below AA, less liquidity, and substantial call exposure. The additional yield therefore isn’t a pure tax arbitrage; it is the compensation that buyers deserve for the credit, structural, and liquidity risk that Treasuries don’t have.

Chart 2

Available Muni Fund Yields Remain Attractive After Tax—But Include Additional Credit and Structural Risk

After-tax 30-day SEC yield of the Vanguard Intermediate-Term Treasury Fund vs. the tax-free yield of the Vanguard Intermediate-Term Tax-Exempt Fund, by federal marginal rate, as of October 19, 2026

VFIUX: 4.92% SEC yield, 5.2-year duration, U.S. Treasury securities. VWIUX: 4.27% SEC yield, 6.0-year duration, 57% rated AA or better, 8% rated BBB or below. The break-even federal rate is 1 − 4.27/4.92, or about 13%. Source: Vanguard; Belvest Family Wealth calculations.

The fund comparison nevertheless illustrates an important practical point: actual muni funds offer considerably more yield than a simple comparison to the AAA benchmark would suggest. (Many investors of size will typically own a portfolio of individual securities, with laddered maturities—in many cases a more relevant solution than owning a one-size-fits-all fund. Still, these considerations apply there, too.)

The state drives the decision

State taxes introduce a separate question: should an investor own a diversified national municipal portfolio or concentrate in bonds issued within his or her home state? Unsurprisingly—it depends!

State residents generally benefit from an additional state income-tax exemption on qualifying in-state municipal bonds. But, there’s a catch: many times, local investor demand means that the yield on in-state bonds is less than you’d get from a diversified national portfolio.

So, there’s an additional dimension to the analysis—not just what the state tax rate is but whether the tax saved exceeds the yield tradeoff of staying in-state.

The available Vanguard single-state funds provide a useful illustration.

Chart 3

Tax Benefit vs. Yield Sacrificed for Selected Single-State Muni Funds

Vanguard single-state long-term tax-exempt funds vs. the Vanguard Long-Term Tax-Exempt Fund (4.69%), in basis points, for a resident at the state's top marginal rate, as of October 19, 2026

Yield given up is the national fund's 30-day SEC yield less the single-state fund's. State tax saved is the 2026 top state rate applied to the 4.69% national yield, assuming the state tax on out-of-state municipal interest is not deductible for federal purposes under the SALT cap. Credit mix differs by fund; see Appendix B. Source: Vanguard; Tax Foundation; Belvest Family Wealth calculations.

There are real differences. Based on current yields, the estimated net advantage of the single-state portfolio is approximately 36 basis points in California, 34 in New York, 28 in New Jersey and 22 in Massachusetts. In Pennsylvania it is only about 7 basis points, and in Ohio approximately 3 basis points.

And this is where it matters. For instance, a Pennsylvania investor currently receives a small mathematical benefit from staying in-state. In our view, however, approximately seven basis points is generally insufficient compensation for sacrificing the diversification available in a national municipal portfolio. Whereas, in California, New York and Massachusetts, the calculus is quite different. The tax advantage can be large enough to justify a substantial in-state allocation.

Not so fast!

A high state tax rate does not automatically argue for a single-state muni portfolio. Take New Jersey for instance. New Jersey’s GO rating is Aa3/A+, and only 31% of the Vanguard New Jersey fund is AA-or-better. That compares to 57% for the national fund. Therefore, the approximate 28-basis-point yield advantage for a top-bracket New Jersey resident comes with meaningfully higher credit risk and geographic concentration.

By contrast, states such as New York and Massachusetts combine relatively high tax rates with stronger underlying credit quality. Minnesota and Oregon also screen favorably on that combination. A broader test using Franklin Templeton’s nineteen single-state funds (Appendix D) tells a consistent story: California and New York are clear wins for in-state paper, Oregon is positive, and in most lower-tax states the in-state fund simply yields too little to justify the concentration. Minnesota, despite its high tax rate, nets out to roughly zero on that test.⁴

The broader lesson is that tax optimization should never substitute for credit analysis. A few additional basis points of tax savings are not worth materially weakening a family’s fixed-income portfolio.

Funds and individual bonds are different solutions

There is another distinction that matters for families using fixed income as a source of stability and future liquidity.

An individual bond has a maturity date. Assuming the issuer pays as promised, an investor who holds it to maturity receives par regardless of interim mark-to-market fluctuations. However, a bond fund doesn’t have a fixed maturity; its managers continuously reinvest the portfolio, maintaining a relatively consistent duration. An investor who needs capital must sell shares at the prevailing market price.

Funds compensate for that limitation with diversification, liquidity and active, professional management.

For substantial strategic municipal allocations, we generally favor laddered portfolios or separately managed accounts of individual bonds, particularly when maturities can be aligned with a family’s expected cash needs. Funds can be useful for tactical allocations and liquidity.

The takeaway

Higher Treasury yields have changed the calculus, but they have not eliminated the case for municipal bonds.

For investors in the 32% federal bracket and above, we believe munis continue to deserve a meaningful place in taxable fixed income. At today’s 73% AAA ratio, the benchmark after-tax advantage is approximately 46–72 basis points, with potentially larger nominal yield advantages available in lower-rated municipal portfolios.

We would not, however, make taxable fixed income an all-muni allocation. Treasuries provide something municipal bonds cannot fully replicate: extraordinary liquidity, negligible credit risk and the ability to serve as a source of capital during periods of market stress. We favor Treasuries for the portion of a portfolio that must remain liquid and defensive, and munis where the investor can accept modest credit and liquidity risk in exchange for superior after-tax income.

For investors in the 22% bracket or below (or generally at 24% without the NIIT) today’s Treasury yields make Treasuries increasingly compelling.

On state selection, we would favor meaningful in-state exposure where the tax benefit is large enough to compensate for concentration and any yield concession. California, New York and Massachusetts currently fit that description particularly well. New Jersey’s tax advantage is also meaningful, but investors should be more selective about credit quality.

In Pennsylvania and other relatively low-tax states, we generally prefer a national municipal portfolio. Pennsylvania’s current single-state advantage is only about seven basis points based on the funds examined here—too small, in our view, to justify giving up meaningful diversification.

Finally, we would continue to watch the muni/Treasury ratio. It has moved from approximately 61% in February to 81% in late September and 73% today. Relative value can change quickly. As our analysis shows, anything above 80% makes munis relatively more attractive.