What Is the Muni-Treasury or M/T Ratio?

Definition and Example of the Muni-Treasury Ratio (M/T Ratio)

The M/T ratio is a formula that is used to compare the rates of municipal bonds with those of U.S. Treasurys. It's a helpful tool for deciding which is a better purchase at any given time, but it is only a rough guide. It's an indicator of how munis have performed against Treasuries in the past.

For example, the muni-Treasury ratio for the one-year period of May 28, 2021, to May 31, 2022, was 82.4%, suggesting that municipal bonds had a higher valuation than Treasuries.

How Do You Calculate the Muni-Treasury Ratio?

The math behind the ratio is fairly straightforward. Divide the yield on AAA-rated municipal bonds (munis) by the yield on U.S. Treasury bonds of the same maturity.

You can use municipal yield indexes like the S&P Municipal Bond Index (10-year) and yields from the Treasury Department's website.

"X" represents the maturity years for the bonds you're comparing. You should always compare similar bonds, such as 10-year munis to 10-year Treasurys. The ratio is 0.75 if the yield on 10-year AAA munis is 1.5% and the yield on the 10-year Treasury is 2.0%.

The higher the M/T ratio, the more attractive munis become. The ratio has averaged between 80% and 90% throughout history, so any higher ratio will generally indicate that munis have performed well.

How to Calculate the M/T Ratio in Excel

There are two ways to calculate the M/T Ratio in Excel. First, you can enter the yield of munis in one cell, and then enter the Treasuries yield in another. In another cell, type in "=cell number/cell number" using munis first, and then press Enter. Alternatively, you can type in the values and formula; for example, "=1.5%/2.0%" and then press Enter.

How the Muni-Treasury Ratio Works

Several factors impact the M/T ratio at any given time. The first is the base level, which is the average of the tax rates for municipal bond investors. For example, suppose the M/T ratio is 0.75. An investor in the 25% tax bracket receives the same after-tax yield on municipal bonds and Treasury bonds at that level.

Now suppose that munis yield 3% and that Treasury bonds yield 4%. The Treasuries investor would receive an after-tax yield of 3% (4% x 0.75), so the yield on the two bonds would be the same.

The two markets should reach an equilibrium based on the average tax rate of the investor base over time. Many investors make buy-and-sell decisions based on after-tax yields.

What It Means for Individual Investors

The M/T ratio is just one tool you can use to assess the value of municipal bonds. Many factors can affect the ratio, so you should always consider the broader picture.

The M/T ratio ran well above average in the years after the 2007–2008 financial crisis due to the aggressive policies of the Federal Reserve (the Fed) that were designed to fuel economic recovery. They included ultra-low interest rates and quantitative easing.

The ratio has moved up and down a great deal since 2020 as a result of COVID-19, but it has still trended in favor of municipal bonds. The yield on munis is trending high to attract investors who are wary of the potential for municipal default in light of the economic crisis and recovery efforts facing many cities.

Keep in mind that municipal bonds can still produce a negative return when the ratio is high. A downturn in Treasury prices is often accompanied by the same downturn in munis. Bond prices and yields move in opposite directions.

With these factors in mind, it's good to observe an investing rule of thumb: It's better to choose your investments based on your own goals and circumstances rather than market conditions.