When Congress searched for ways to offset the cost of the administration’s proposed tax cuts last year, the federal tax exemption on municipal bond interest landed in the crosshairs.

We argued at the time that the uncertainty was creating an opportunity for investors (“Amid Exemption Debate, Muni Investors Keep Reaping”). Municipal bond prices had come under pressure, pushing yields higher, even though the underlying credit fundamentals of state and local governments remained strong.

Fortunately – and wisely – the exemption was preserved. But something interesting has happened since: The higher yields that created buying opportunities during the uncertainty have persisted.

Opportunity remains

The municipal yield curve remains unusually steep. As noted in a report in The Bond Buyer, the difference between 2- and 30-year benchmark municipal yields recently stood at 189 basis points, compared with 89 basis points for comparable Treasury maturities.

The report argues that investors are being well compensated for extending maturities and that those who remain on the sidelines because of concerns about inflation or interest rates may be sacrificing meaningful income.

Also, long-term yields remain compelling on a tax-equivalent basis. Recently, the report noted, 30-year AAA municipal bonds yielded 4.32%, so for an investor in the highest federal income-tax bracket, that translates to a taxable-equivalent yield of 7.29%. For investors who also benefit from a state income-tax exemption, the yield advantage is even greater.

Yields remain historically attractive

Consider, too, the historical perspective. Taxable-equivalent yields on investment-grade municipal bonds remain in the top quartile of their 10-year history, as noted by LPL Financial, providing investors with uncommon income opportunities.

Importantly, the credit backdrop remains supportive. LPL noted that nearly 95% of the Bloomberg Municipal Bond Index is rated A-/A3 or better – “a historically high figure” – while reserves remain elevated relative to historical levels and default rates remain low.

Supply is helping as well. Municipal issuance is on pace for another record year, with estimates around $600 billion. A large supply of new bonds can give investors more choices and create opportunities to put money to work at elevated yields.

Focus on what we know

For long-term buy-and-hold investors, the important question isn’t where interest rates will be next month or even next year. It’s whether today’s market provides an opportunity to lock in attractive tax-exempt income for years to come.

Last year, when the threat to the exemption was particularly acute, investors could have waited for the uncertainty to be resolved. Those who did missed opportunities to buy at favorable yields. But today’s market offers compelling value as well.

As we’ve said for decades, there are always reasons to wait. Debate over eliminating or modifying the tax-exemption on municipal bond interest will likely never disappear completely, and prognostications over where interest rates might be headed will always be present.

But with long-term yields still elevated, a steep municipal bond curve, generally strong credit quality and substantial new supply coming to market, waiting – as always – has a cost.