The municipal bond market and munis-related exchange traded funds are experiencing their best March rally in seven years as investors shifted into the tax-favorable asset ahead of the April filing deadline.

Ever since the March 6 low, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) gained 1.6%, SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) increased 1.5% and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) rose 1.9%. Munis are now pace for their best March performance since 2008. [Muni Bond ETFs Look Attractive After Pullback]

According to Bank of America Merrill Lynch, the recent pullback in munis and related bond ETFs were partly attributed to some investors redeeming the assets to pay their tax bills, reports Meenal Vamburkar for Bloomberg.

However, looking ahead, with the federal tax rate up to 39.6%, the highest since 2000, muni investors are less likely to sell the asset before the April 15 tax-filing deadline as the bonds are tax exempt on the federal level.

“Given the higher federal marginal tax rate, there’s more of a compelling argument to hold muni positions,” Jeffrey Lipton, head of muni research at Oppenheimer & Co., said in the article.

Munis offer a higher yield after accounting for the tax exemptions. For instance, MUB has a 1.58% 30-day SEC yield or 2.8% taxable equivalent yield for those in the highest income bracket, TFI has a 1.93% 30-day SEC yield or 3.42% taxable equivalent, and ITM has a 2.09% 30-day SEC yieldl or 3.45% taxable equivalent. In contrast, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a similar duration profile of 7.71 years, comes with a 1.85% 30-day SEC yield. [Use Municipal Bond ETFs to Diversify a Portfolio]

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