When advisors think about municipal bonds, the conversation almost always centers on tax-exempt bonds — and for high-bracket clients, that focus is entirely justified. The tax math favors it, and the yield advantage of the exemption is meaningful at current rates. But taxable municipal bonds represent a growing and often misunderstood segment of the $4.4 trillion muni market, and for specific client situations, they can add value that the tax-exempt segment simply can’t match.
The market for taxable munis has grown substantially in recent years. The segment now accounts for roughly $33 billion annually in issuance, up significantly from prior cycles. Much of the growth reflects a practical reality for issuers: certain projects that once qualified for tax-exempt financing — advance refundings, some private activity bonds — lost that status under the 2017 Tax Cuts and Jobs Act. Issuers who still needed to access capital had to do so on a taxable basis. The result is a rich and growing universe of investment-grade taxable muni bonds from high-quality state and local government issuers.
The credit profile of this segment is where things get interesting. A study comparing A-rated taxable municipal bonds to A-rated corporate bonds from 2009 through 2023 found a result that deserves more attention than it typically gets: there were zero defaults among A-rated taxable munis over the 14-year period studied. Among comparably rated corporate bonds in the same sample, there were 11 defaults. The study’s author — who is also the chief investment officer for a $4.5 billion insurance company with approximately $1 billion in muni exposure — put it plainly: “I would much rather invest in the muni, both in terms of default rates and in terms of the yield that you’re getting off of those.”
That finding points to a structural feature of the muni market that many advisors underappreciate. Municipal issuers operate with fundamentally different incentives and constraints than corporate borrowers. Most states have balanced budget requirements that prohibit deficit spending. Essential service revenues — water, sewer, utilities, transportation tolls — provide income streams that are legally required, economically inelastic, and backed by the government’s ability to raise rates or taxes. The political and reputational consequences of default create additional deterrents that simply don’t exist in the corporate world. When a corporation defaults, it’s a restructuring event. When a municipality defaults, it’s a political failure with consequences at the ballot box and in the bond market for years.
The rating agencies appear to apply more conservative standards to munis than to comparably rated corporates. The academic research suggests this conservatism is, if anything, excessive — an A-rated muni appears to carry meaningfully lower actual credit risk than an A-rated corporate with the same label. For investors, this creates an opportunity: taxable munis often yield more than comparably rated corporates — the extra yield partially compensating for the loss of the federal tax exemption — while historical default experience suggests the credit risk is actually lower.
Where does this matter most for advisors? The clearest application is for clients holding bonds in tax-deferred or tax-exempt accounts. An IRA holder gets no incremental benefit from the federal tax exemption — the tax treatment of bond income inside a retirement account is the same regardless of whether the bond is tax-exempt or taxable. For those clients, reaching for taxable munis over corporate bonds of similar ratings can provide better yield with a stronger historical credit profile. It’s a straightforward upgrade, and it’s one that relatively few advisors make systematically.
Taxable munis are also worth considering for lower-bracket clients for whom the yield math on tax-exempt bonds doesn’t pencil out, for institutional investors like pension funds and insurance companies (who have long recognized the value here), and for clients building portfolios with an eye toward in-state bond concentration limits — taxable munis from other states don’t carry state-tax exemption anyway, so the calculus shifts.
The practical challenge is that taxable munis are less liquid than the core tax-exempt market and require more credit work per position. They’re not a substitute for a well-constructed tax-exempt allocation — they’re a complement to it, appropriate in specific contexts. But for advisors who haven’t reviewed taxable muni exposure systematically across their book, the asset class is worth a closer look.
