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Elevated Tax-Exempt Yields Boost Muni Appeal

Elevated Tax-Exempt Yields Boost Muni Appeal

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HIGHER MUNI YIELDS MAY INCREASE TAX SHELTER POTENTIAL

Source: Bloomberg as of 3/31/2024. AA muni yield represented by yield-to-worst on Bloomberg Municipal AA Index. Taxable equivalent yield calculated using a 40.8% federal tax rate on a hypothetical $1 million investment. Bloomberg Municipal AA Index represents the AA-rated portion of the Bloomberg Municipal Bond Index, which represents the long-term investment-grade tax-exempt bond market. All indexes are unmanaged. Investors cannot invest directly in an index. Past performance does not guarantee future results. 

CHART HIGHLIGHTS 

  • The tax-equivalent yields on municipal (muni) bonds have increased more than threefold (from 1.72% to 5.67%) over the past two years. 
  • As interest rates remain elevated, muni bonds provide attractive tax-exempt income that can increase after-tax return potential. 

MORE SPOTLIGHT ON THE MARKETS

Elevated Yields May Boost Bond Return Potential
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Elevated Yields May Boost Bond Return Potential

Mar 4, 2024

The Federal Reserve has stated its intent to keep rates in their normalized range, which may make now a good time to allocate to fixed income.

Bonds Increasingly Attractive If Fed Cuts Rates
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Bonds Increasingly Attractive If Fed Cuts Rates

Jan 19, 2024

With the tightening cycle likely complete and rising potential for several rate cuts this year, now may be a good time to allocate to bonds.

Volatility And Dispersion Offer Tax-Benefit Opportunities
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Volatility And Dispersion Offer Tax-Benefit Opportunities

Nov 30, 2023

Fueled by volatility and dispersion, investment strategies that incorporate tax-loss harvesting may help improve after-tax outcomes in both up and down markets.

Footnotes

Tax-equivalent yield is the yield on a taxable bond that an investor would have to earn to match the return on a comparable tax-free municipal bond. A tax shelter is a vehicle to lower taxable income, such as through tax-advantaged accounts like municipal bonds which provide tax-exempt income. Yield to worst is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting.  

Investing involves risks. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. Investors cannot invest directly into an index. Fixed income investments are subject to credit, market, and interest rate risks, and their value will decline as interest rates rise. Investing in municipal bonds involves credit and market risks.  

The views expressed herein are those of PGIM Investments professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. This commentary does not purport to provide any legal, tax, or accounting advice.  

Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice.  

Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change.  

© 2025 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property and a service mark of MSCI, Inc. (MSCI) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P). GICS classifications and related GICS information are provided “as is” with no express or implied warranties. Bloomberg®, Bloomberg Short U.S. Aggregate Bond Index, Bloomberg U.S. Aggregate Bond Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by PGIM Investments. Bloomberg is not affiliated with PGIM Investments, and Bloomberg does not approve, endorse, review, or recommend PGIM Investments products. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to PGIM Investments products. Frank Russell Company (FRC) is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination, or redistribution is strictly prohibited. This is a presentation of the Russell Index data. Frank Russell Company is not responsible for the formatting or configuration of this material or for any inaccuracy in presentations thereof.  

This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.  

Investment products are distributed by Prudential Investment Management Services LLC, member FINRA and SIPC. PGIM Investments is a registered investment advisor and investment manager to all PGIM U.S. open-end investment companies. PGIM Custom Harvest, PGIM Quantitative Solutions, Jennison Associates and PGIM are registered investment advisors and Prudential Financial companies. PGIM Quantitative Solutions is the primary business name of PGIM Quantitative Solutions LLC, a wholly owned subsidiary of PGIM. PGIM Fixed Income and PGIM Real Estate are units of PGIM.  

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