Thomas Kennedy

Chief Investment Strategist, J.P. Morgan Private Bank


What if we told you that currently, top U.S. taxpayers can get equity-like yields (after tax considerations) by investing in municipal bonds?

Even if you’re not in a high-tax state, municipal bonds are currently a potentially attractive – and rare – opportunity.

We think municipal bonds’ currently high yields offer a chance for you to reach toward your financial goals with less risk than we have seen in 15 years – you may want to consider deploying some cash into this fixed income sector, or perhaps consider reallocating some of your fixed income. Depending on your goals, you may also want to consider rotating some of your holdings out of equities or other higher-risk investments.

The case for municipal bonds is also strong when you adjust for the risk. The municipal bond market has a history of extremely low defaults. (State and city budgets are also generally balanced, and “rainy-day funds” are robust.1) Within the fixed income universe, municipals at current levels offer compelling relative value to comparable lower-risk bonds.

Here’s more on why.

Municipal bonds’ compelling yields

In recent weeks, New York and Texas issued headline-worthy municipal bonds: 5% yields, tax-free. Interest rate hikes, and the rise in longer-dated bond yields, have created this compelling situation. We’ve only seen municipal bond yields this high for a few months out of the 15 years since the global financial crisis. On a tax-equivalent yield basis,2 municipal bond index yields3 rival the yields of fixed income investments with higher risk. These yields even rival the historical annual total return of the S&P 500 since the turn of the 21st century.

“Equity-like” current fixed income yields

Bar chart showing the yields of fixed income vehicles from December 31, 2021 to November 2023.


Past performance is no guarantee of future results. It is not possible to invest directly in an index.

Today’s compelling yields were brought to you by a series of Federal Reserve (Fed) rate hikes meant to contain inflation. But the hiking cycle is probably near its end, which means the yields won’t be available for much longer. As has been the pattern for decades, bond yields tend to fall once the Fed is done hiking – on average, by about 1 percentage point in the year after the last Fed rate increase.

Yields tend to fall once the Fed is done hiking

Line chart showing the trend for yields of 10-year UST in relation to the months since the last Fed hike.


Looking further into the future, J.P. Morgan Asset Management’s latest Long-Term Capital Market Assumptions projects U.S. 10-year Treasury yields to fall between 3% and 4% over the next 10 to 15 years, down from about 4.75% today. We expect municipal yields to follow. With this outlook, we believe now is a time for tactical and strategic asset allocators to consider municipal bonds.

Municipals have extremely low default risk

Since 2017, municipal bond defaults have averaged 0.14% annually.4 In 2017, Puerto Rico defaulted (it was the biggest municipal bond default in history) but even then, the annual default rate for the market as a whole was only 0.70%.

Federal debt has ballooned to more than 100% of GDP, but not so for cities and states. Their debt-to-income ratios have remained near the same levels for half a century. The majority of municipalities must propose and/or sign a balanced budget. And in 2015, 38 states required their legislatures to pass balanced budgets.5

State and local debt stock has not grown

Line chart showing the level of federal debt versus state and local debt in relation to GDP from 1930-2022.


Taken together, the $4 trillion municipal bond market has an average credit rating of AA,6 the same as the U.S federal government.

Also comforting for investors: States’ median rainy-day fund balances have surged to 12% of general fund spending, thanks to COVID-era federal policies that saw the federal government borrow and distribute funds to citizens and municipalities.7

These rainy-day funds – dedicated cash reserves set aside for unexpected expenses or an unforeseen decline in revenues – have grown steadily since 2011, when they equaled just 1.8% of general fund spending (in the wake of the global financial crisis). 

The largest issuers of tax-exempt bonds – California, New York, Texas, Illinois, Florida, Pennsylvania and New Jersey – have much larger rainy-day fund balances than they did five years ago, as a percentage of general fund spending. (Or in the case of Texas, the fund-to-spending balance has remained about the same.)8

Top muni bond issuers’ rainy-day funds have grown

Bar chart showing the level of rain-day funds as percent of general fund spending for seven U.S. states in 2017 and 2023.


Healthy balance sheets suggest states and municipalities will be even more resilient to any unfortunate economic shocks if they lie ahead. 

Munis offer more value relative to bonds with similar risks

In the search for yield, municipal bonds shine relative to similar, lower-risk fixed income such as Treasuries, as well as investment grade bonds. 

Currently, tax-free municipal bonds yield 75% as much as (federally taxable) Treasury bonds. That’s not the best it’s ever been.9 But we don’t expect that ratio to return to historic norm, as the most likely cure for the ballooning federal deficit is higher taxes, which will only serve to further raise the attractiveness of munis. Also important to note, the Tax Cuts and Jobs Act, which lowered taxes for millions of Americans, is set to sunset in 2025.10

Municipal yields also compare favorably with investment grade bonds. Munis offer approximately 65% of the average investment grade bond’s yield. That’s good, historically speaking. Over the last five years, this metric averaged only 50%.11 Ahead, we expect a reversion to historic averages.

We think these strong relative values, and the tax outlook, make investing in municipals even more prudent, so your portfolio can benefit from today’s high tax-free yields without taking on much default risk.

An unusually compelling opportunity

The bottom line? We believe this is the most compelling opportunity for municipal bond investors in 15 years. As an attractive yield meets an extremely low default risk, investors have an unusual opportunity to reach their financial goals with less risk. Reach out to your J.P. Morgan advisor to learn more.



J.P. Morgan Asset Management. As of October 2023.


The taxable equivalent yield (TEY) measures what an investor would have to earn (yield) on a taxable investment to match the yield of the tax-free municipal bond. Taxable equivalent yield assumes a federal tax rate of 37% and Medicare surcharge on investment income of 3.8%.


Bloomberg 10-year Municipal Bond Index.


Bloomberg Finance L.P. Data as of October 3, 2023.


"The State of State (and Local) Tax Policy," Tax Policy Center Briefing Book, Urban-Brookings Tax Policy Center, 2022.


Average of credit ratings from S&P, Moody’s and Fitch.


All but five states have more in their rainy-day funds today, as a percentage of general fund spending, than they did in 2017. The only exceptions: the rainy-day funds of Alaska, South Dakota, Texas, Washington and Wyoming.


J.P. Morgan Asset Management. Data as of October 27, 2023.


Muni bond yields, on average over the past five years, were 84% of T-bonds.


The Tax Cuts and Jobs Act greatly reduced the number of families that pay the alternative minimum tax,


Bloomberg Finance L.P., J.P. Morgan. Data as of October 31, 2023.

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J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.


Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the Alternative Minimum Tax (AMT).


Bloomberg 10-year Municipal Bond Index (BCM10): An unmanaged index that includes investment grade tax-exempt bonds with maturities between 8 and 12 years.S&P 500: A market-value-weighted index that contains 500 U.S. stocks selected on the basis of liquidity, size and representativeness of industry sector.

S&P 500: A market-value-weighted index that contains 500 U.S. stocks selected on the basis of liquidity, size and representativeness of industry sector.

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