Municipal Bonds Yield Up to 5% Tax-Free, Offering 10% Taxable-Equivalent Returns for Top Earners

Municipal bonds are yielding as high as 5% tax-free amid recent bond market turmoil, equating to taxable-equivalent yields above 10% for investors in the highest tax brackets, financial advisers say. Very high earners face combined marginal rates exceeding 50%, including the 37% federal rate, a 3.8% investment income surtax, and state and local taxes reaching 14.8% in New York City and 13.3% in California. For a middle-class single filer in New York City facing a 32% top marginal rate, a 5% tax-free muni equals a 7.4% taxable bond, surpassing the Vanguard Long-Term Corporate Bond ETF (VCLT) at 6.2% and the iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB) at 6.4%. Advisers caution that achieving 5% yields requires 25- to 30-year maturities, introducing interest-rate and inflation risk. Some recommend intermediate durations of four to five years, yielding near 4%. Others question the "taxable-equivalent yield" framing, noting the tax savings represent forgone liability rather than earned income.