Which type of bonds usually have the lowest before-tax yield?

Municipal bonds typically offer the lowest before-tax yield among the various types of bonds because they are often tax-exempt. Investors who purchase municipal bonds do not have to pay federal income tax on the interest earned, and in some cases, they may even be exempt from state or local taxes. This tax advantage allows municipalities to issue their bonds at lower yields compared to taxable bonds, such as corporate or Treasury bonds, while still attracting investors seeking after-tax returns that are competitive.

While corporate bonds and high-yield bonds usually offer higher before-tax yields to compensate for the additional credit risk associated with them, Treasury bonds provide returns that are fully taxed at the federal level. In contrast, the tax exemption of municipal bonds motivates investors to accept lower before-tax yields because their after-tax returns can remain attractive, especially for those in higher tax brackets. Therefore, municipal bonds indeed tend to have the lowest before-tax yield when comparing them to other bond types.