If you look at the numbers, there can be no doubt that the municipal bond market has outperformed the Treasury bond market through the summer. Such a performance has certain implications for muni buyers, the biggest being, "Should buyers of tax-exempt bonds switch to taxables?" Put another way, have tax exempts become too rich versus taxable bonds? If we compare the New Jersey Turnpike 7.20 percent tax-exempt bond due Jan. 1, 2018, against the Treasury bond 8.75 percent due May 15, 2017, at two different times during the summer, we will be able to see how strongly the muni market outperformed the Treasuries.

The numbers show that over a three-month period, while the Treasury bond lost 7 1/2 points ($75 per bond) and its yield rose 77 basis points, the muni only lost 1 point ($10 per bond) and saw its yield increase by only 11 basis points. The main reason for this phenomenon is the lack of new issues in the municipal market.

The figures below show that munis are at their richest levels to Treasuries in two years.

When you realize that 28 percent will be the new peak marginal tax rate, you can see that if some of the tax exempts are too rich versus the Treasuries.

In theory, this would mean that individual investors would only purchase municipals at ratios above 72 percent. In other words, for every marginal dollar of income, Uncle Sam takes 28 cents and you are left with 72 cents.

From the table above, we see that the AAA general obligation five-year and 10-year are below that 72 percent ratio. The actual tax exempt yield on the five-year is 5.60 percent. The taxable equivalent on 5.60 percent is 7.77 percent. That means that if you can buy a taxable bond yielding above 7.77 percent, you will have a greater after-tax yield than if you bought the 5.60 percent tax exempt.

Further, the five-year FNMA is currently yielding a taxable 9.06 percent. The after-tax portion of that FNMA yield is 6.52 percent. You obtain 92 basis points more tax-exempt yield by purchasing the five-year FNMA than you do by purchasing the five-year general obligation at 5.60 percent.

Conclusion: The shorter tax-exempt maturities (one to seven years) are more than likely too rich, and comparable taxable bonds are more attractive on an after-tax basis. Some investors are selling their short munis and are buying securities like the FNMAs to take advantage of the greater after-tax return.

James E. Lebherz has more than 28 years' experience in fixed-income investments.