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After breaking records on a number of metrics , municipal bonds are having a moment .

By Jennifer Lea Reed

Given the pounding that municipal bonds took for most of last year and the stellar turnaround taking place now , asset managers can be forgiven for wanting to shout the good word from the rooftops .

The S & P Municipal Bond Index showed a 3.21 % return for January , the highest monthly return since 2009 . For those who need reminding , that ’ s tax-free at the federal level , and sometimes at the state and local levels , too , making this investment extremely attractive to tax-sensitive ( read : highnet-worth ) clients . The taxable equivalent would be 4.9 % for someone in a 35 % tax bracket ( using the formula of dividing the return percentage by one minus the tax bracket percentage ) and with very low risk .

Ask Kevin Knowles , a senior director of personalized solutions and direct indexing at Russell Investments in New York , and he ’ ll say that , while extremely favorable yields are driving 2023 ’ s surge , the tax-efficiency of municipal bonds has been luring a growing fan base for a while . “ Everyone used to be focused on pretax returns , and now it seems like there ’ s been a shift to focusing on the actual after-tax return ,” he says . “ I don ’ t know what happened behaviorally within the advisor universe that made them say , ‘ Oh , wow , we should actually be looking at what the investors are keeping as opposed to what they ’ re making on paper with that pretax return .’ Because if a lot of that is distributed in capital gains at the end of the year , you pay taxes on it and that just puts a drag on your portfolio for … forever .”

Now that municipal bond yields are close to record highs and sources say they are predicting a good year ahead , there are three primary reasons it ’ s time for financial advisors to revisit their municipal bond allocations .

Those Juicy Tax-Exempt Yields

Back in October , municipal bond yields were as high as they ’ d been in the last 13 years , hitting a yield of 4.423 %, the taxable equivalent of 6.8 %. And even with a slight pullback , at the time this article went to press they were still at 3.712 %, close to all of the other high points over the last decade , according to the S & P Municipal Bond Index .

Considering they started 2022 at around 1 %, that is quite a feat , sources say . “ After a fairly disastrous year for fixed income in 2022 , the last four to five weeks have been very refreshing from a return perspective . Rates across the board increased ,

44 | FINANCIAL ADVISOR MAGAZINE | MARCH 2023 WWW . FA-MAG . COM