What Drives Municipal Bond Yields?

At one point near the end of July 2016, using data from Bloomberg, the 10-year Treasury note was yielding 1.47% and 10-year AAA-rated municipals were yielding a virtually identical 1.46%. From a tax perspective, given their federal tax exemption (and for most residents buying their own state’s bonds, a local tax exemption as well) we would expect municipals to trade at significantly lower yields.

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