Municipal Bonds: Currently, the Longer the Better
Municipal bonds (munis) provide interest income that's generally exempt from federal income taxes, and often state taxes, making these fixed income securities relatively attractive for investors in higher tax brackets. For investors who fit into this category and are comfortable with the possibility of taking on some added interest rate risk, we believe that high-quality, longer-term municipal bonds currently look attractive, particularly compared with Treasury securities.1
Sources: Schwab Center for Financial Research®; Bloomberg. Data as of 11/28/25. AAA munis are represented by the Bloomberg BVAL Yield Curve, which is populated with high-quality U.S. municipal bonds with an average rating of AAA from Moody's and S&P. Treasuries assume a 37% and 3.8% Net Investment Income Tax (NITT). All names and market data shown are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. For more information on indexes, please see schwab.com/indexdefinitions. Past performance is no guarantee of future results.
When it comes to relative yield advantages, longer is currently better
As the chart above illustrates, the spread between AAA-rated muni and Treasury yields after taxes—meaning, the difference in yield between the two types of securities, after factoring in taxes—is greater at the longer end of the bond maturity yield curve. Right now, the difference begins to especially increase for bonds with about 10 years left until they mature and beyond. So, longer-term munis presently offer an even more noticeable yield advantage compared with similar-maturity Treasuries. Also, if you'd like a refresher on bonds, bond ratings, and types of bonds, here's an article that you might find helpful: "What Is a Bond? Understanding Bond Types and How They Work."
Putting the relative yield advantage of munis into a bit more context, the yield on a generic 5-year municipal bond rated AAA—this credit rating represents the highest quality for muni securities—is about 25 basis points more than for a Treasury security with a similar time to maturity, after considering taxes. Remember, one basis point equals 0.01%. And when you look even further out along the bond maturity curve, the yield difference between the two rises to more than 110 basis points for bonds with 20-year maturities and to more than 140 basis points for 30-year maturities.1
So, how can you potentially take advantage of these yield opportunities for longer-term municipal bonds? Among the many investment options that are available, here are two that may be aligned with your needs and worth exploring.
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Option #1: Separately managed account strategies
A separately managed account centered on munis is one option that might be appropriate for your needs. Even incredibly savvy investors don't necessarily have the time or resources to fully research and manage an extensive bond portfolio on their own. Part of the complex equation that it takes to manage a bond portfolio is the need to properly understand your risk tolerance and where to draw the line between relative trade-offs when opportunities present themselves.
In addition, while highly liquid markets like the one for Treasuries tend to be relatively transparent, municipal bond markets are comparatively idiosyncratic and opaque. This means that a deeper level of expertise, knowledge, and understanding of the underlying credit considerations associated with a given municipal bond issuer is often important. The way that the municipal bond itself has been structured should also play a role in your decision-making, in addition to seasonal issuance patterns for the state or district securing the bond, which can help to inform whether or not now is a good time to buy. So, for many investors, separately managed muni strategies can make a great deal of sense versus a go-it-yourself approach.
Option #2: Actively managed muni bond funds
Another strategy to consider is to select an actively managed mutual fund or exchange-traded fund (ETF) that fits your risk profile and meets your portfolio's unique needs, while also meeting your investment objectives. Actively managed muni fund managers are generally able to adjust holdings within strategy limits when they think that they've found attractive investment opportunities and might be a fit along these lines.
For example, an actively managed municipal bond manager might decide to emphasize securities within a maturity range of seven to 10 years, and then balance these holdings with munis from other areas of the bond maturity curve, like shorter-term bonds maturing in a year or two, in order to achieve an overall interest rate sensitivity—or duration—for the fund that's aligned with its mandate. Such a strategy might be used to complement your core fixed income allocation, or potentially even serve as part of your core bond holdings. For more information about actively managed fixed income funds, here's a related article: "The Case for Actively Managed Bond Funds."
Bottom line
For tax-sensitive investors, munis can fulfill an important role within the fixed income part of their portfolios. These securities offer investors a compelling mix of generally high credit quality and attractive tax-adjusted yields. Moreover, for investors who already believe that these securities make sense as part of their overall fixed income allocation, now may be a particularly good time to think about the attractive relative yields that are currently available at the longer-term end of the municipal bond maturity spectrum.
1Schwab Center for Financial Research, "Muni Bonds: Where Are the Potential Opportunities?," published 10/28/25; accessed 11/21/25: https://www.schwab.com/learn/story/muni-bonds-where-are-potential-opportunities.
The Bloomberg U.S. Municipal Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed tax-exempt bond market. The index includes state and local general obligation, revenue, insured and pre-refunded bonds. The AAA, AA, A, Baa, 1 Year (1-2), 3 Year (2-4), 5 Year (4-6), 7 Year (6-8), 10 Year (8-12), 15 Year (12- 17), 20Year (17-22), and Long Bond (22+) are all subindices.
The Bloomberg U.S. Treasury Index includes public obligations of the U.S. Treasury excluding Treasury Bills and U.S. Treasury TIPS. The index rolls up to the U.S. Aggregate. Securities have $250 million minimum par amount outstanding and at least one year until final maturity.
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Investing involves risk, including loss of principal. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Past performance is no guarantee of future results.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.
Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security's tax-exempt status (federal and in-state) is obtained from third parties, and Charles Schwab Investment Management, Inc., dba Schwab Asset Management, does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.
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