Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
Your browser is out of date.


August 23, 2022  |  5 Minute Read

John Tousley

Global Head of Market Strategy, Strategic Advisory Solutions

John Tousley


Municipal bonds struggled in the first half of 2022 as rising rates and a volatile market backdrop drove one of the worst outflow periods on record. Losses were exacerbated by technical factors, but we believe that we may be on the other side of the re-pricing. We think elevated yields, still-strong fundamentals, and a favorable historical yield-to-return relationship may entail attractive future returns for munis.


Historical surges in the after-tax yield pick-up of municipals relative to Treasuries have had limited staying power when fundamentals remain intact. As seen in Exhibit 1, past spikes in spreads between 10-Year AAA muni yields and after-tax 10-Year Treasury yields were followed by quick retrenchments. We expect to see a similar pattern today, especially as state and local government balance sheets are still supported by pandemic-related federal relief and elevated tax receipts, indicating strong credit quality. 


Exhibit 1: Municipal Bonds’ After-Tax Yield Advantage Relative to US Treasuries


Household Net Worth Near All-Time Highs

Source: Bloomberg and Goldman Sachs Asset Management. As July 31, 2022. Chart shows most recent ten years of data, from August 1, 2012 to July 31, 2022. “10-Year Treasury After-Tax Yield” refers to the 10-Year US Treasury yield multiplied by one minus the highest marginal income tax rate at given time. “Spread” refers to difference between Municipal Bond 10-Year AAA Yield over 10-Year Treasury After-Tax Yield. “Rolling two-year average” refers to average of all data points over past twenty-four months, changing each period to reflect new month. Past performance does not guarantee future results, which may vary. Goldman Sachs does not provide accounting, tax or legal advice. Please see additional disclosures at the end of this document.


It remains to be seen where Treasury yields will ultimately settle, but we think that muni yields may have realized the worst of their pain already. A reversion in the after-tax yield pick-up may act as a tailwind for investors and drive future returns.


To demonstrate this point, we show two independent trends in Exhibit 2 that are true today. First, when muni yields are greater than their average across the past 12 months, subsequent returns have been attractive. In such instances, the Bloomberg Municipal Index realized 12-month returns have been greater than its starting yield 82% of the time, with an average difference of 373 basis points. Second, when the yield is in the top quintile of its past two years, the subsequent 12-month return exceeded the starting yield even more frequently, at 91% of the time, and with an average difference of nearly 500 basis points. While we believe that forecasting what may come in the months ahead remains a challenge, history suggests that an abrupt rise in muni yields provides a buffer to returns and as such is often followed by a period of recovery.


Exhibit 2: Bloomberg US Municipal Bond Index Returns


Household Net Worth Near All-Time Highs

Source: Bloomberg and Goldman Sachs Asset Management. As of July 31, 2022. Chart shows the historical performance for the municipal bond index under different conditions compared to the starting yield to worst for the index. Specifically, data is in rolling one-year periods. “YTW” refers to yield to worst. Yield to worst is the lowest yield an investor can expect when investing in a callable bond. It is computed by using the lower of either the yield to maturity or the yield to call on every possible call date. “✔“ refers to the respective criteria being fulfilled in the current period. “pp” refers to percentage points. Past performance does not guarantee future results, which may vary. For illustrative purposes only.


Distinctions exist in every market environment, even when patterns generally hold true. Munis, however, still exhibit strong fundamentals despite this year’s setbacks from rising rates and overwhelming outflows. As a result, higher yields and greater potential for capital appreciation may suggest more favorable forward returns for munis.



Related Insights

  • GSAM Perspectives

    Asset Management Perspectives: Inflection Points

    04 August 2022 The macroeconomic backdrop is changing. It may be time for investment playbooks to change, too. In our latest issue of Perspectives, we examine how investors might navigate risk—and seize opportunities—as we move into a new era. Read More
  • GSAM Connect

    Municipal Bonds: Are We There Yet?

    09 June 2022 The Fed’s hawkish turn has pushed up yields and pushed down prices of nearly all types of bonds, Munis being no exception. Now, investors face the difficult task of deciding when to wade back in given higher yields, locking in higher income and return potential. Read more about our views on The Fed’s path here. Read More
  • GSAM Connect

    Navigating the New Market Regime: The Merits of Value Equities

    23 May 2022

    The old saw that Value investing beats Growth investing actually holds true over an extended investment horizon. However, the last 15 years have defied this paradigm. Through April 2022, Growth has outperformed Value by nearly 5% on an annualized basis and in 11 of the last 15 years. But 2022 may actually mark a regime change. Learn more why now might be an opportune time to implement a rebalancing, or even an overweight allocation to Value across various equity portfolio sleeves.

    Read More

Start the Conversation

Committed to providing you with the insights you need to build your practice.




“Yield-to-return” relationship refers to historical analysis comparing starting yields on the Bloomberg Municipal Bond Index to realized subsequent 12-month total returns.

“Basis points” refers to a unit represented by one hundredth of one percent.

“Percentage points” refers to a unit represented by one percent.

Risk Considerations

Investments in fixed-income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Although Treasuries are considered free from credit risk, they are subject to interest rate risk, which may cause the underlying value of the security to fluctuate. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).

The above are not an exhaustive list of potential risks. There may be additional risks that are not currently foreseen or considered.

Index Benchmarks

The US Treasury Bond is a debt obligation backed by the United States government and its interest payments are exempt from state and local taxes. However, interest payments are not exempt from federal taxes.

The Bloomberg Municipal Bond Index covers the USD-denominated long-term tax-exempted bond market, including state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

Municipal Bond 10-Year AAA refers to Muni Municipal 10-year. BVAL Muni BVAL Municipal 10-year Yield approximates yields on high quality tax-exempt US municipal bonds with an average credit rating of AAA from Moody's and S&P and tenor of 10-years

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

The Bloomberg US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment grade corporate bonds, and mortgage backed and asset-backed securities.

Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of the securities discussed in this document.

Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer.  Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind.  Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness.  We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this commentary and may be subject to change, they should not be construed as investment advice.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.


This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Date of first use: August 23, 2022. 288420-OTU-1656036.

Please enter your email address to continue reading.

Confirm Your Access

An email has been sent to you to verify ownership of your email address.

Please verify the link in the email by clicking the confirmation button. Once completed, you will gain instant access to our insights.

If you did not receive the email from us please check your spam folder or try again.