After adjusting for taxes, municipal bond yields should be comparable to Treasuries for similar maturities. Ok, so why aren’t they? Taxes are commonly thought to be part of the answer, and for good reason. Munis are free of federal taxes and sometimes state and local taxes as well. Treasuries, on the other hand, are taxable on the federal level and exempt from state taxes. Calculating what the yields should be by factoring out taxes should leave similar yields after making the proper adjustments. But Mr. Market has often seen fit to ignore this academic rule of thumb. Why? In particular, why are tax-adjusted muni-bond yields higher than expected relative to U.S. Treasury Bonds? Good question, and a new research paper recently listed on the Federal Reserve’s web site (and added to our Research Room today) claims to have some fresh insight on the muni yield conundrum, and by extension, what it means for investors.