Municipal Bonds Rates by State: 2026

Municipal Bonds Rates by State: 2026

Between January and May 2026, Journey Advisory Group compiled municipal bond rate data tracked by Bloomberg, FMSbonds, SIFMA, and the MSRB.^1,2,3 This report presents average municipal bond rates for all 50 states, national credit rating benchmarks, the tax math behind in-state versus out-of-state bonds, and what it all means for investors building retirement income in the Greater Cincinnati, Northern Kentucky, and Dayton regions.

Municipal Bonds Rates by State: 2026

The table below shows the average yield on a 5-year general obligation bond for each U.S. state, alongside the state’s top marginal income tax rate. Verified Bloomberg Fair Value yields are available for ten states (marked with an asterisk); remaining yields were estimated using national benchmark curves, state credit ratings, and the tax-demand framework described later in this report.^2,3

Key Insights:

• High-Tax States Show the Lowest Nominal Yields: New York (2.43%), Hawaii (2.48%), and Oregon (2.52%) carry the lowest municipal bond rates in the country, not because their bonds are safer, but because wealthy residents in those states create intense demand for in-state tax-exempt income, compressing yields below national averages.²
• No-Income-Tax States Cluster Near the National Average: Texas (2.81%), Florida (2.60%), and Nevada (2.80%) show yields that track closely with the national 5-year index (3.04%), because there is no state tax incentive to prefer local bonds over out-of-state options.²³
• Illinois Is the Outlier: At 3.03%, Illinois carries the highest yield among major states, reflecting its lower credit rating (A3/A-) and substantial pension liabilities rather than tax-driven demand dynamics.²
• The Full Spread Is 60 Basis Points: The difference between the lowest-yielding state (New York at 2.43%) and the highest (Illinois at 3.03%) is driven primarily by tax policy and credit quality, not by differences in default risk across states.²³

National Yield Curves and Credit Rating Benchmarks

To put the state-level data in context, the table below shows what investors can expect to earn on municipal bonds nationally, broken down by credit rating and maturity. These are institutional-grade benchmarks based on secondary market trades of $2 million or more.³

Key Insights:

• Credit Spreads Are Tight at the Short End: The difference between a 10-year AAA bond (3.10%) and a 10-year A-rated bond (3.40%) is only 30 basis points, suggesting the market sees relatively low default risk across investment-grade municipals in the current environment.³
• Spreads Widen With Duration: At the 30-year mark, the AAA-to-A spread expands to 35 basis points, reflecting the added uncertainty of projecting municipal tax revenues and pension obligations over three decades.³
• The 20-Year Maturity Offers a Compelling Tradeoff: Moving from 10-year to 20-year AAA bonds picks up a full percentage point of yield (3.10% to 4.10%), while extending from 20 to 30 years adds only 35 basis points, a diminishing return for the added interest rate risk.³

The Tax Math: In-State vs. Out-of-State Bonds

One of the most common questions municipal bond investors face is whether to stick with bonds issued by their home state or to buy bonds from other states that may offer higher yields. The answer depends on a simple calculation: does the higher out-of-state yield compensate for the state income tax you will owe on that income?

Here is a concrete example. If you live in California and hold a California municipal bond yielding 2.57%, that income is exempt from both federal and California state taxes. If you bought an Illinois bond instead, you would owe California’s 13.30% state tax on that income. The question is whether the higher Illinois yield (3.03%) compensates for the tax you would pay.

The formula is straightforward:

Required Out-of-State Yield = In-State Yield / (1 - State Tax Rate)

For California: 2.57% / (1 - 0.133) = 2.96%

Because Illinois yields 3.03%, which is above the 2.96% threshold, a California investor actually earns more after taxes by buying the Illinois bond and paying the state tax penalty. This is counterintuitive for most investors, and it is one reason why working with an advisor who understands fixed-income tax dynamics can meaningfully improve after-tax returns.²

Key Insights:

• Most Investors Outside California and New York Benefit From National Diversification: For residents of states with moderate or no income tax, restricting purchases to in-state bonds sacrifices yield without a meaningful tax benefit.²
• The Hurdle Rate Is Lower Than Most People Expect: Even in California, the nation’s highest-tax state, the required out-of-state yield is only 39 basis points above the in-state yield, a gap that many out-of-state bonds comfortably exceed.²
• Illinois Bonds Are Unique: Illinois often taxes its own municipal bond interest even for in-state residents, effectively eliminating the home-state advantage and making national diversification the default strategy for Illinois investors.²

State-Specific ETF and Mutual Fund Yields

For investors who prefer diversified exposure rather than individual bonds, state-specific municipal bond funds serve as useful proxies for each state’s aggregate yield environment. The table below compares 30-Day SEC yields across major state-specific funds as of May 2026.^4,5

Key Insights:

• California and New York Funds Yield Less Than the National Average: VTEC (3.17%) and MUNY (3.48%) both trail the iShares National Muni Bond ETF (MUB at 3.45%), confirming that high-tax demand compresses yields even at the portfolio level.⁴
• Ohio Leads All State Funds at 3.99%: The Vanguard Ohio Long-Term Tax-Exempt Fund delivers the highest yield and the strongest year-to-date return (1.05%), reflecting Ohio’s more moderate tax environment and lower pricing pressure.⁴
• Duration Matters for Interest Rate Sensitivity: The Massachusetts fund carries an 8.1-year average duration, meaning a 1% rise in interest rates would reduce its value by roughly 8.1%. Investors concerned about rate volatility should weigh duration alongside yield.⁴

Market Size and Issuance Trends

The supply side of the municipal market has been historically active. Understanding issuance volume helps explain why yields have moved the way they have in 2026.^1,7

Key Insights:

• 2025 Set an All-Time Issuance Record: At $582 billion, municipal bond issuance in 2025 was the highest on record, a 13% increase from prior highs driven by infrastructure spending and refinancing activity.¹⁷
• Retail Investors Still Dominate: Individual investors hold approximately 70% of all outstanding municipal bonds, either directly (48%) or through mutual funds and ETFs (21%). This retail concentration is rational: institutional investors like pension funds are already tax-exempt and gain nothing from holding tax-free bonds.¹
• Fund Inflows Remain Strong: Municipal mutual funds recorded approximately $5 billion of net inflows in April 2026 alone, pushing year-to-date inflows toward $30 billion, reflecting sustained demand despite broader market volatility.⁷

What the Data Means for Your Fixed-Income Allocation

The data across every table in this report points to three conclusions for investors evaluating municipal bonds in 2026. First, where you live determines what you should own: investors in high-tax states like California and New York face fundamentally different pricing dynamics than investors in Ohio, Texas, or Florida, and a one-size-fits-all approach leaves money on the table. Second, the current yield curve rewards investors who extend duration into the 15-to-20-year range, where each additional year picks up approximately 12 basis points of yield, but flattens significantly past the 20-year mark.³ Third, on a tax-adjusted basis, municipal bonds currently offer superior value relative to comparable Treasuries, with taxable equivalent yield ratios reaching 111% at 10 years and 145% at 30 years for investors in the highest federal bracket.³

For investors in or approaching retirement, building a municipal bond allocation involves more than picking the highest-yielding state. It requires coordinating bond maturity with anticipated cash flow needs, understanding how municipal income interacts with Social Security taxation and required minimum distributions, and determining whether an in-state, national, or blended approach maximizes after-tax income given your specific state tax situation.

Journey Advisory Group advisors work with clients in the Greater Cincinnati, Northern Kentucky, and Dayton regions to build fixed-income strategies that account for all of these variables. Schedule a consultation to discuss how municipal bonds fit within your overall financial plan.

Disclosure:

This material is prepared by Journey Advisory Group for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Municipal bonds are subject to credit risk, interest rate risk, and may be subject to the Alternative Minimum Tax. Past performance is not an indicator of future results. Journey Advisory Group is a Registered Investment Adviser (RIA) registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.

Sources:

1. Securities Industry and Financial Markets Association (SIFMA). "U.S. Municipal Bonds Statistics." Q4 2025. https://www.sifma.org/research/statistics/us-municipal-bonds-statistics

2. Charles Schwab. "When to Choose Munis From Outside Your Home State." July 17, 2025. https://www.schwab.com/learn/story/when-to-choose-munis-from-outside-your-home-state

3. FMSbonds, Inc. "Market Yields." May 26, 2026. https://www.fmsbonds.com/market-yields/

4. Vanguard. State-specific tax-exempt bond fund pages. May 2026. https://advisors.vanguard.com

5. iShares. "iShares National Muni Bond ETF (MUB)." May 21, 2026. https://www.ishares.com/us/products/239766/ishares-national-amtfree-muni-bond-etf

6. Tax Foundation. "2026 State Income Tax Rates and Brackets." 2026. https://taxfoundation.org/data/all/state/state-income-tax-rates-2026/

7. Municipal Securities Rulemaking Board (MSRB). "Muni Facts." 2025. https://www.msrb.org/sites/default/files/2022-09/MSRB-Muni-Facts.pdf