The Muni Bond Myth That Cost High-Earners Millions

High-income investors historically placed municipal bonds in taxable accounts for their federal tax-exempt interest and placed Treasuries and corporate bonds in IRAs. A shift has emerged in which Treasury bonds are used in taxable accounts for some high-income clients. The change is tied to evidence from 2020 showing municipal bonds behave differently from Treasuries, including major revenue declines such as New York MTA’s 96% drop. The result is a reassessment of municipal credit risk, with the view that without federal intervention some municipal issuers would have faced stress and defaults. Yield and tax calculations have also changed, reducing the certainty of munis’ advantage.

"“Municipal bonds, they used to be viewed as really close cousins of Treasury bonds,” he said, and a decade ago “it would be, you know, kind of borderline malpractice to put Treasury bonds, you know, taxable bonds into a taxable account” for someone in the top brackets."

"“What we saw in 2020 with the pandemic was that municipals really are very different from treasuries,” Grossman said. His proof point is the kind of number that sticks: the New York MTA “famously saw revenue decline 96% in 2020.” Without federal intervention, he argues, “those bonds would have come under a lot of stress and there would have been defaults.”"

"The logic was straightforward. Munis were treated as effectively default-proof, and their federally tax-exempt coupons gave high earners a better after-tax yield than comparable Treasuries. With top federal marginal rates at 37% above $626,350 in taxable income for single filers in 2025, the math has historically favored munis decisively."

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