Municipal Bond Forum
Muni-to-Treasury ratio
Q
In your article, “Bump in Supply Feeding Municipal Bonds Demand,” you said: “Also appealing to investors is the muni-to-Treasury ratio, a common gauge of the attractiveness of highly rated municipal bonds. It’s currently near its 20-year low, which means the after-tax yields on Treasuries would need to surge to make U.S. government debt more lucrative than municipal bonds.” Please help me clarify the meaning of the muni-to-Treasury ratio. I always thought that a higher muni-to-Treasury yield ratio made the tax-equivalent yield on munis more favorable versus Treasuries.
A
James A. Klotz responds:
The interest on U.S. Treasury bonds is subject to federal income taxes.
The yield and interest on municipal bonds are net to the holder. Therefore, muni yields are considered “after-tax yields.”
The ratio compares the net muni yields to the after-tax yield of Treasury bonds, which is based on the investor’s tax bracket.
The closer nominal yields on Treasuries and munis, the smaller (lower) the ratio.
But it means that munis, yielding close to taxable Treasuries, would be a bargain after taxes are paid on Treasury bonds.
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