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Direct Comparison Between Munis and Treasuries

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Hi All,

Perhaps I'm just a little burned out from the CFA exam, but can someone help me understand what equivalents/conversions are necessary to directly compare the after-tax yield on munis vs treasuries? I particular, I'm interested in comparing a muni fund yielding 0.9% vs. 3, 6, 9, 12 month bills & notes. I think I need to use the taxable equivalent yield on the muni fund which would be (0.009/(1-marginal tax rate)). However, I'm rather confused when it comes to the treasuries as far as which yield do I use and if I need to adjust for periodicity. Bloomberg provides after-tax calculations, but again, do these rates need annualized?

Any help is greatly appreciated! Thanks

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Interest on treasuries is not taxed at the state level, but fully taxable at the federal level.  Muni bond interest is not taxable federally, and unless it is issued by the state you live in, it is taxable at the state level.  Your formula is correct, but you need to also consider the state tax treatment, so a muni bond that is state tax exempt as well would be Yield/(1-fed marginal rate - state marginal rate) = tax equivalent yield.  For the treasury, it's Yield/(1-state marginal rate) = TE yield.  Your bigger problem is what # you are using for yield on a muni bond fund.  It is unlikely to yield an apples to apples comparison as funds are constantly rolling off maturing securities and replacing them with securities with a different yield.  You are also not going to be able to accurately compare like maturities, as treasuries have a stated maturity & the mutual fund is open ended as to maturity.  More importantly than all of this is the risk differential between the two assets--a 1 year treasury is far safer than a muni bond fund, even if it has a stated short-term objective.

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