Why is there any point to munis?
By that I mean, why aren't yields driven down to be equal to the after-tax yields of taxable bonds of similar maturities and credit quality?
Obviously they are driven down somewhat, but why aren't they driven down to the point of indifference?
Generally speaking, they probably are driven to the point of indifference once you correct for other variations in the instruments.
If two different bonds had the same risk profile but different tax treatment then, ceteris paribus, they would be arbitraged to post-tax indifference. But munis behave in their own way, and generally one shouldn't equate those bonds to taxable instruments.
