Sitting in Cash? The Rare Three-Way Opportunity to Investing in Municipal Bonds 

The Dilemma You Face Today 

If you are like many high net worth individuals right now, you have significant cash sitting on the sidelines. A recent study from the Federal Reserve shows that more than $6 trillion (with a “T”) is currently parked in money market funds, the highest level on record. 

That may feel comfortable. Money markets are often paying 4%+, and cash offers the illusion of safety. Current yields are higher than the inflation rate – a near anomaly. But you know it will not last. 

At the same time, stocks are trading near all-time highs. Which as an investor feels great, but putting cash to work at these levels feels risky, or at the least may give you pause. And so the dilemma continues: hold cash that can (and likely will) lose its yield overnight, or step into stocks that feel expensive. 

For moderate and conservative investors, there is a third option that has not looked this compelling in decades: municipal bonds. 

Why Munis Stand Out Right Now 

Municipal bonds offer a three-way opportunity rarely seen in fixed income: 

1. Historic yields today 

2. Price appreciation if rates fall 

3. A long-term setup powered by future higher taxes, retiring demographics, normalization of rates, and infrastructure demand 

What are Municipal Bonds? 

Municipal bonds, or “munis,” are debt issued by states, cities, counties, and local districts to finance public projects. When you vote for a school bond, a county road expansion, or a new water system, those projects are typically funded through bonds that are packaged and sold to investors. The income generated to repay investors is backed by reliable revenue streams such as property taxes, sales taxes, and in some cases specialty fees like tolls or utility payments. 

For investors, the interest paid on most municipal bonds is exempt from federal income tax. This makes them especially powerful for high-income households in taxable accounts. By contrast, they are generally not appropriate for tax-deferred accounts such as IRAs, since the tax advantage is wasted inside an already tax-sheltered vehicle. 

1. Historic Yields Today and the After-Tax Advantage 

Muni yields are sitting at levels last seen in the mid-2000s: 3.5–4% on average. While the nominal yields may not seem overly enticing, consider the tax benefits. For investors in higher brackets, the tax-equivalent yield (TEY) makes them even stronger: 

• Tax-Equivalent Yield (TEY) = Tax-Free Yield ÷ (1−Marginal Tax Rate) 

• A 4% muni yield is about 6.3% taxable equivalent in the top federal bracket (37%). 

Compare that after tax: 

• 5% money market → ~3.15% after tax 

• 4.5% Treasury → ~2.8% after tax 

• 4% muni → still 4% after tax (≈6–7% taxable equivalent) 

That is the hidden edge: munis do not just match cash and Treasuries, they beat them once you account for taxes. Remember, all fixed income interest earned is taxed at your ordinary income tax rate except municipal bonds.  

If you have a significant amount of taxable interest income on your 1040 Schedule B – ask yourself “why?” Because there is a better way! 

2. Price Appreciation if Rates Fall 

When interest rates drop, bond prices rise. 

A 1% decline in yields could add 6–8% in price to an intermediate muni portfolio. 

With munis, you are not just collecting income. You have room for capital gains if rates ease. 

By contrast, when rates fall in money markets or short-term Treasuries, nothing happens to your principal. You simply watch your yield disappear. When yields on municipal bonds drop, the dollar amount of interest generated doesn’t change, the yield calculation just gets compressed because your principal increases. You mailbox money stays steady. With money markets, your actual income drops. 

Of course, rising yields have the opposite effect and can pressure bond prices lower. But ask yourself: do you believe the Fed is more likely to raise rates from here, or lower them? Much of the damage in price action has already been absorbed during the 2022 interest rate hikes. And importantly, if you hold individual municipal bonds to maturity, your capital redeems at par.  

Visualizing the Upside 
The chart below from JP Morgan shows how different fixed income sectors respond to shifts in interest rates. Notice how municipals deliver steady income in flat-rate environments and meaningful appreciation if rates fall. Unlike cash equivalents, which have no price upside when rates decline, munis offer both income and potential gains. 

 Source: JP Morgan Asset Management, as of October 22, 2025.  

3. The Long-Term Setup 

Beyond today’s entry point, several enduring forces reinforce the case for munis: 

• Higher Taxes: With federal debt above $34 trillion, higher tax rates are a long-term reality, making tax-free income increasingly valuable. 

• Demographics: Over 10,000 baby boomers retire every day. As they transition from growth to income, demand for predictable, after-tax cash flow accelerates. 

• Normalization of Rates: From 2000–2020, the 10-year Treasury averaged about 3.5–4%. Locking in today’s muni yields, already at 20-year highs, sets a strong baseline before they revert closer to that modern long-term range. 

• Infrastructure Demand: America’s roads, bridges, water systems, and power grids all require renewal. Trillions in capital spending will flow through municipal markets, ensuring a steady supply of bonds. 

Together, these drivers make municipals not just attractive today, but a long-term structural opportunity. 

The Bottom Line 

Cash feels safe, but it is temporary. Yields shrink sharply after taxes and offer no upside. 

Stocks offer growth, but at today’s highs, investors may be reluctant to deploy cash. 

Munis provide the middle ground: 

1. Tax-advantaged yields not seen in 20 years 

2. Capital appreciation potential if rates fall 

3. Structural support from higher taxes, demographics, normalization of rates, and infrastructure spending 

That is why munis stand apart today. They are not just another bond allocation. They are one of the most compelling opportunities in fixed income right now for taxable portfolios.