Can municipal bonds be threatened and lucrative?

If you’re following news out of Washington, it’s a bit disorienting.

On the one hand, the Trump administration and Congress are trying to raise revenue to offset tax cuts. They’ve floated trillions of dollars worth of ideas and have an array of targets in their crosshairs – including the tax exemption on interest earned from municipal bonds.

The House Ways and Means Committee estimated that cutting the exemption would save a relatively paltry $250 billion over 10 years. What’s more, it will come with a price tag.

According to the U.S. Conference of Mayors, eliminating the tax exemption would raise the borrowing costs of issuers – state and local governments – by $832.98 billion between 2026 and 2035.

And there’s more.

“That cost would be passed onto taxpayers and lead to a $6,554.67 tax and rate increase for each American household over the next decade,” the organization said.

Muni ‘trifecta’ in 2025

At the same time state and local leaders, budget officials and the bond industry try to forestall the threat, market analysts have found a lot to like in municipals.

The market is enjoying a “trifecta” for 2025, as Barron’s said in a recent article – a combination of attractive yields, strong fundamentals and state and local governments’ “ample” reserves.

“We’re sitting at yields that are at decade highs, so you’ve got more yield than you’ve had in the market for a very long time,” Paul Malloy, Vanguard’s head of municipals, told Barron’s.

“Combine that with exceptional credit quality. The municipal market is predominantly A, AA and AAA issuers, all of critical infrastructure. And then you’ve had a really strong fiscal position over the last four to five years, and state and local governments have really used that money wisely. They’ve built rainy-day funds, they’ve given themselves some buffer for turbulent times like you’re seeing today in the market.”

Another attractive feature is what municipal bonds have always been known for – a ballast during turbulent times, as in mounting tariffs and recession fears.

“Municipal bonds would do very well in a recession scenario,” Malloy said.

Opportunities abound

If investors are confused, we understand: Municipal bonds are under attack, yet the market is thriving and opportunities abound. It’s an unusual situation (“Amid Exemption Debate, Muni Investors Keep Reaping”).

While we don’t know what the future holds, the predominate view of market professionals is that it’s likely the exemption will not be eliminated, and if it is, it would almost certainly apply to future bonds (“13 Words That Could End the Muni Exemption”).

That’s why it’s valuable to have a discussion with your tax-free bond specialist and why veteran municipal bond investors are taking advantage of it.