Here is some info. on muni bonds. http://reports.finance.yahoo.com/z1...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000
The non-callable Aug 09 TSY discount strip is at 3.924% YTM. Equivalent munis clock in at about 3.000% YTM. Two things account for the difference : federal tax + default risk The haircut here is about 23% (0.77 x 3.924 = about 3). So, without doing more precise math, you should buy munis roughly speaking if your tax bracket is higher than 23% In case someone is wondering why the non-call zeros - they make for the easiest theoretical comparisons because you don't have to worry about reinvestment rate of return on the coupons or optionality or any other nasty stuff. TSY Strip http://reports.finance.yahoo.com/z1...ytl=-1&ytu=-1&mtl=48&mtu=60&rl=-1&ru=-1&cll=0 Muni zeros http://reports.finance.yahoo.com/z1...ytl=-1&ytu=-1&mtl=48&mtu=60&rl=-1&ru=-1&cll=0
Student - for bonds with coupons I'm still seeing a haircut of 35% or so. You can also do a 'clean' comparison by looking at price and coupon. For example, a 2-year T-Note trading near par has a coupon of 3.75% http://reports.finance.yahoo.com/z2...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000 while a AAA non-callable muni near par has a coupon of around 2.38% http://reports.finance.yahoo.com/z2...0000&ytl=-1.000000&ytu=-1.000000&yu=-1.000000 or about 36%, which corresponds quite well to the top federal rate of 35%. It could be your zero calculation may not be as simple as you suppose -- given that Tsy strips are taxable for 'interest' that isn't actually paid.
Jamis, I think the TSY has 4 coupons to maturity while the Muni has 3. The time effect on taxes on the OID accretion are miniscule at current rates and over such a short horizon.
Basically , munis are good if you are in 35% bracket. As far as safety goes, go only with insured bonds .