To compare bond yields, you need to factor in your income-tax rates

Investors have been worried about falling bond prices, but those have led to yields that are high enough to bring some income-seekers back to the bond market.

As we go through a period of declining prices for bonds, yields are rising. So the frightening headlines about declining bond prices leave out the opportunities for income-seeking investors.

Dan Close, Nuveen's chief investment officer and the head of the firm's municipal fixed-income team, told MarketWatch that there had been $68 billion in inflows of client money into US. mutual funds and exchange-traded funds so far in 2026. "There is a good deal of comfort that, even when the market is done, these absolute yields are something to lock in."

Those words - "when the market is done" - refer to the inverse relationship between bond prices and interest rates. If interest rates rise after you purchase a bond, the bond's market value will fall enough so that its yield, based on the market price, will match the yield of a newly issued bond of similar credit quality. So it will be no fun to watch the price of your bond decline, but if you wait until it matures, you will be paid the face value of the bond. And as you wait, you will collect interest.

And that is the whole point: Bonds are most useful to income-seeking investors who are not expecting bond prices to rise as stock prices rise.

But if you want to select bonds or bond funds for the most attractive yields, you need to factor in your income-tax rates and the bonds' credit quality. So we will discuss taxable-equivalent yields for comparison, as well as credit quality and the risk of default.

How to compare bond yields

In the following discussion, taxable-equivalent yields are calculated using 2026 federal tax brackets, which have been compiled by NerdWallet, based on the Internal Revenue Service's revision to the tax bracket ranges published last October.

U.S. Treasury securities pay interest that is exempt from state and local income taxes. Most municipal bonds issued by government entities in U.S. states pay interest that is exempt from federal income taxes. A tax-exempt municipal bond is also exempt from state income taxes if held by a resident of the state in which it was issued. And a tax-exempt muni issued in New York City, for example, will be exempt from city income taxes as well.

A Treasury example

Let's begin with an example that incorporates only state and local income-tax brackets, with the most commonly cited benchmark bond.

The recent selloff in the bond market has pushed the yield on 10-year U.S. Treasury notes BX:TMUBMUSD10Y to 4.92% Thursday morning from 4.47% at the end of June and 4.17% at the end of 2025.

The 4.92% yield on the 10-year Treasury doesn't tell the whole story. To compare it with a high-quality corporate bond or a bank CD, we need to calculate the bond's taxable-equivalent yield.

For example, if you are a resident of New York City in the 6.85% state tax bracket (with income as an individual ranging between $215,401 and $1,077,550 or between $323,201 and $2,155,350 for a married couple filing jointly), your city tax rate is 3.876%, for a combined state and city tax rate of 10.726%.

You can do your own calculations using your own state income-tax rate and local income-tax rate if you are subject to one.

For reference, here are links to NerdWallet's list of New York and California income-tax brackets.

To calculate the taxable-equivalent yield for the 10-year Treasury note, divide its yield by 1 minus the combined city and state income-tax rate. So for our NYC resident, 1 minus 0.10726 is 0.89724. The 10-year bond's 4.92% yield divided by 0.89724 gives us a taxable-equivalent yield of 5.48%. That compares very well to August CD rates tabulated by the Federal Deposit Insurance Corp. And it is higher than the 5.10% yield-to-worst (defined below) for the Bloomberg U.S. Aggregate Index, a widely cited benchmark for investment-grade corporate bonds.

Treasury yields are actually yields-to-maturity. And that term requires other definitions:

Maturity date and call date: This is when a bond will be repaid at face value. Municipal and corporate bonds also typically feature call dates; the issuer may call the bond (redeem it at face value or more) on or after the call date.

Price: This is a bond's price relative to its face value. If a bond is trading at its face value, we say it is trading at 100, or at par. If it is trading at 1% above or below its face value, we say it is trading at 101 or 99, respectively.

Coupon: The interest rate that a bond issuer pays based on the bond's face value.

Yield: The expected rate of return on a bond, expressed as a percentage. The current yield is a bond's coupon rate divided by its price. A bond trading at a discount to par will have a current yield higher than the coupon. A bond trading at a premium to par will have a current yield below the coupon.

Yield to maturity: An annualized figure that factors in the current market price, the coupon and the capital gain or loss if you hold the bond until maturity.

Yield to call: This is similar to the yield to maturity, except that it incorporates the call date rather than the maturity date.

Yield to worst: The lower of the yield to maturity and the yield to call. Typically, this will be the only market-price-based yield figure available when selecting bonds through a brokerage account, which helps simplify comparisons.

Tax exempt municipal bonds

An investor can apply the same method used for the 10-year Treasury note example above to municipal bonds that are exempt from federal income taxes and which might also be exempt from your state's income taxes.

If you are in a state with no income taxes or with a low tax rate, you might not even bother trying to stay within your state when selecting individual munis. Of course you can also consider bond funds, and state-specific municipal bond funds available.

Keep in mind that a bond fund has a fluctuating share price that will move in the opposite direction of interest rates. The same ideas apply for long-term investors, but you don't have a fixed maturity date as you do with an individual bond. Patience is required. If income is your main objective, you must be able to separate your thinking about the value of your bonds, or bond-fund shares, and the steady flow of income over a period of years.

"The broadest metric I look at is the Bloomberg Municipal Bond Index ," Nuveen's Close said. This index is a benchmark for the U.S. investment-grade tax-exempt municipal market, with an effective duration of 6.95 years, according to FactSet. Duration is a measure of volatility for bond portfolios. A duration of 6.95 indicates that if interest rates rise by 1%, the bond portfolio's market value will decline by about 6.95%, and vice versa.

"We use the 37% bracket and assume a 3.8% Medicare/ACA surcharge," Close said, when discussing taxable equivalent yields. So if we take the Bloomberg Municipal Bond Index's yield-to-worst of 4.08% and divide it by 1 minus the combined top federal tax bracket of 40.8%, our calculation is 4.08% divided by 0.592, which is 6.89%.

An example of an exchange-traded fund tracking the broad U.S. investment-grade municipal-bond market, with a portfolio that is also exempt from the federal Alternative Minimum Tax, is the is the $45 billion iShares National Muni Bond ETF MUB. It quotes a 30-day SEC yield of 3.65%, for a taxable-equivalent yield of 6.17% for people in the highest federal bracket. The SEC yield is the mandated yield bond funds must quote for comparison.

Another example is the $49 billion Vanguard Tax Exempt Bond ETF VTEB, which quotes a 30-day yield of 3.80%, for a taxable equivalent of 6.42% for investors in the highest federal bracket.

Higher credit risk for higher yields on munis

Close co-manages the $12 billion Nuveen High Yield Municipal Income ETF NHYM, which quotes a 30-day yield of 4.84%, for a taxable-equivalent yield of 8.18% for investors in the highest federal bracket. This fund was established in January 2025 and follows a strategy similar to that of the Nuveen High Yield Municipal Bond Fund NHMRX, which was established in 1999.

So you are looking at a much higher yield, but about 51% of the bonds held by NHYM are unrated or have ratings considered below investment grade. These funds also focus on bonds with maturities of more than 10 years.

Credit-ratings firms are paid by bond issuers to analyze the bonds and the financial health of the issuers to come up with a credit rating. The two largest credit-rating firms are S&P Global and Moody's Ratings. At S&P, a bond is considered to be "investment grade" if it is rated BBB- or higher. At Moody's, the minimum investment-grade rating is Baa3. You can review S&P's ratings hierarchy here and Moody's rating scale here.

When asked about the likelihood of the Nuveen High Yield funds taking credit losses, Close said, "We have the largest credit team on the buy side. We have historically experienced less than 1% default rates."

In Wall Street parlance, the "buy side" refers to money managers, while the "sell side" refers to brokerage firms.

Comparing individual bond yields

A taxable-equivalent yield of more than 8% is of course very attractive for an income-seeking investor who can remain committed for the long term. But the above examples were all based on investors in the highest federal income-tax bracket. You might find munis to be attractive even if you are in the 24% federal income-tax bracket, which is $105,701 to $201,775 for married joint filers. It can be grating to send estimated quarterly tax payments to the IRS.