Long Term Perspective
The spread between the 10-year Treasury note yield and municipal bond yields is usually negative. That is, yields on Treasury securities are higher than on municipal bonds because the interest on muni-bonds is free from federal income taxes and the yield represents a tax-free yield rather than a taxable yield as it does for Treasuries and other corporate bonds. The reduced supply of Treasury long bonds beginning in 2000 led to a sharp reversal in the normal trend. (Fourth quarter figures on municipal bonds were not available at the time of this publication.)

Short Term Perspective
Yields on municipal bonds came down in 2000. However, the drop in these yields was minor relative to the decline in Treasury yields. As a result, the average spread between the 10-year Treasury note and the municipal bond of various risk categories narrowed significantly and actually turned positive from 2000 through 2002. The spread is usually negative by a significant margin, but the reduced supply of long bonds coupled with an increased demand for the new 10-year Treasury benchmark led to a reversal in the normal trend. In fact, the yield on the Baa-rated muni-bond is much higher than the yield on 10-year Treasuries, and even the A bond was higher through November! December data is not yet available for municipal bonds.