Beatles, Bonds, and the Taxman

From playlists to tax planning

I was a radio disc jockey in college back in the 1990s, when terrestrial radio was still a thing and actual humans chose what went on the air. We had a fair amount of creative freedom, and timely themes often drove my song choices.

As a penny-pinching, money-conscious undergrad, my playlists took on a clear theme as tax season approached. Songs by some of my favorite artists lamenting the negative impact of taxes made it into my rotation.

Tracks like the Beatles’ “Taxman,” Cheap Trick’s “Taxman, Mr. Thief,” and the Steve Miller Band’s “Take the Money and Run” were staples that time of year.

Back then, I spent far more time curating playlists than thinking about taxes. Today, however, like many investors, minimizing my tax bill is a high priority—not just during tax season, but year-round.

Tax-exempt income

One of the best ways investors can help shield their income from taxes is by investing in tax-exempt municipal bonds. Municipal bond interest is generally exempt from federal income taxes and, in many cases, state and local taxes as well. The tax‑equivalent yield of municipal bonds often exceeds that of taxable bonds, corporate credit, and even some equity dividend strategies.

The higher rate environment that we’ve been in over the past year has made tax-exempt income from municipals even more attractive. This can be especially appealing to high‑income, high-tax investors.

For example, a municipal bond or mutual fund yielding 4% currently offers a taxable-equivalent yield of more than 6% for an investor in the highest federal tax bracket. That’s more than a 50% increase in net income when compared with a taxable equivalent.

Exhibit 1: Yield comparison

Sources: Bloomberg Finance L.P. and Allspring. *Based on the highest federal (37%) and state tax bracket and assuming the investor is also subject to the additional 3.8% Medicare surtax on net investment income (40.8%). Assumes non-deductibility of state income tax at federal level. As of 29-May-26.

Historically high yields

Yields are also trading near historical highs, which makes municipals more attractive than they have been in recent memory.

Municipal bond yields continue to look attractive. Yields stood at just 0.95% in January 2021, before rising through 2022 and peaking at 4.49% in October 2023 as the Federal Reserve raised interest rates. While yields have moderated some lately, they continue to look attractive, particularly on a tax-equivalent basis.

Exhibit 2: Muni yields over time

Sources: Tax Foundation and Allspring. *Based on the highest federal (37%) and state tax bracket and assuming the investor is also subject to the additional 3.8% Medicare surtax on net investment income. Assumes non-deductibility of state income tax at federal level. As of 29-May-26.

Reduced relative risk potential

Additionally, municipal bonds have historically exhibited relatively low credit risk. Compared with corporate bonds, municipals have experienced lower default rates across all credit ratings. For example, BBB-rated municipal bonds have historically had lower default rates than AAA-rated corporate bonds.

Exhibit 3: Comparative default rates for municipal and corporate debt

Sources: Bloomberg Finance L.P. and Allspring, as of 31-Dec-25. Source: S&P Global Ratings. For municipal defaults, S&P’s study period was 01-Jan-86 to 31-Dec-24 (dated 06-May-25). For corporate defaults, S&P’s study period was 01-Jan-81 to 31-Dec-24 (dated 29-April-25). The calculation represents a 15-year cumulative default rate. S&P’s study calculations include all ratings in the C category, from CCC to C.

Municipal bonds also can be an important part of a well-diversified portfolio. Municipals historically exhibit lower correlation to equities¹ compared with corporate bonds, and with stable cash flow, they can also offset volatility in other asset classes. In higher rate environments, municipals can serve as both a portfolio ballast and volatility dampener.

A compelling backdrop

Periods of higher interest rates have historically created favorable entry points for municipal bond investors. Elevated tax-exempt yields can help enhance total return potential; reduce interest rate sensitivity; and, alongside strong credit fundamentals, appeal to income-focused, tax-aware investors.

Active management may help investors capitalize on this environment. In our view, disciplined credit selection remains essential and experienced managers can identify relative value across sectors, seeking to select bonds thoughtfully based on price and opportunity.

1. Source: Bloomberg Finance L.P.

All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.

This material is provided for informational purposes only and is intended for retail distribution in the United States.

Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.

Standard & Poor’s, Fitch Ratings, and Kroll Bond Rating Agency rate the creditworthiness of bonds from AAA (highest) to D (lowest). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories. Moody’s rates the creditworthiness of bonds from Aaa (highest) to C (lowest). Ratings Aa to Caa may be modified by the addition of a number 1 (highest) to 3 (lowest) to show relative standing within the ratings categories. Credit quality and credit-quality ratings are subject to change.

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