Compelling AMT Muni Bond Yields: Hiding in Plain Sight?

For years, investors seeking tax-efficient income grappled with a key question: Are municipal bonds that are subject to the alternative minimum tax (AMT) worth their higher yields? After all, an attractive bond yield didn’t hold as much luster once the AMT shaved off up to 28%.

The Tax Cuts and Jobs Act of 2017 (TCJA), with its far-reaching changes to AMT guidelines, altered the tax landscape dramatically—the number of taxpayers subject to AMT has plummeted from 5.2 million to only some 200,000 today. And with spreads to non-AMT bonds historically wide today, that’s great news all around—especially for investors no longer subject to the AMT.

AMT muni bonds fund unique capital projects, such as airport improvements, hospital expansions, and student-loan and affordable-housing programs. Usually, they don’t fit squarely into a government “public purpose” box like traditional tax-exempt munis do. Their income became subject to the AMT back in 1986, and their yields have historically run much higher than non-AMT munis.

Six Years After TCJA, AMT-Subjected Munis Are Worth a Closer Look

Since the AMT now touches far fewer investors, we think AMT munis are an attractive investment opportunity. For example, the yield premium offered by airport AMT munis over tax-exempt airport munis declined slightly right after 2017’s tax laws took effect. But that premium started rising again in 2021, and today hovers at early 60 basis points (Display).

Of course, investors’ individual circumstances and tax situations will vary. But, generally speaking, with AMT munis consistently offering higher yields and with the AMT practically a nonfactor, we believe they’re attractive income source tucked away in an easily overlooked corner of the muni market.