# Why the 5.25% bond pays less than the 3.25% one By James Ustby, CFP®, APMA®. Published 2026-09-09. Canonical URL: https://jamesustby.com/articles/nest-egg-why-the-5-25-bond-pays-less-than-the-3-25-one > Wednesday, September 9, 2026 · Markets, tax and estate planning for people who earn well *This article first appeared in The Nest Egg, my daily email, on 2026-09-09. [Read the original issue](https://retirement-wealth.beehiiv.com/p/why-the-5-25-bond-pays-less-than-the-3-25-one). It is educational, not a recommendation for you. The household in it is a hypothetical example, and market figures are as of the date shown and will have changed.* ## Who this is for You are somewhere between 35 and 65. You earn well, and probably from more than one place: a salary, a K-1, a practice, a building. You have a CPA. You may have an advisor. There is an attorney who drew up the trust four years ago and has not been heard from since. You have also noticed that none of them are ever in the same room, and that the interesting questions live exactly where their jobs overlap. This letter is that room. Every weekday morning: what moved overnight, and then one worked case on a balance sheet that looks like yours, argued out by the four people who should be arguing about it. No recommendations. No projections. Published rates, primary documents, and the arithmetic done out loud so you can check every line of it. ## The Tape **S&P 500 /ES** 7,660.75 ▼ −19.75 (−0.26%) **Dow /YM** 52,614 ▼ −218 (−0.41%) **Nasdaq 100 /NQ** 29,412.25 ▼ −126.50 (−0.43%) **2-year Treasury** 4.419% ▲ +2.1 bp **10-year Treasury** 4.806% ▲ +0.2 bp **30-year Treasury** 5.250% ▼ −1.4 bp **Gold /GC** $4,438.20 ▼ −0.02% **WTI crude /CL** $95.20 ▲ +2.33% **VIX** 16.18 ▲ +2.93% Futures and cash yields quoted at 6:23am ET, Wednesday, September 9, 2026. Equity moves are front-month futures against their own prior settle, not against the index close. Gold is COMEX December 2026. Source: CNBC pre-market data. ## The Story Iran’s Revolutionary Guard Corps said Wednesday it struck two American vessels and eight oil tankers in the Gulf, in a statement carried by the semi-official Tasnim News Agency. It was retaliation for Tuesday, when US Central Command destroyed five Iranian crude tankers and named all five of them. WTI is $95.20 this morning, up 2.33%. Brent has touched $100. The oil volatility index is up 8.07%. USS Roosevelt transits the Strait of Hormuz. US Navy photo by MC1 Indra Beaufort, December 5, 2025. Public domain, via DVIDS. Here is the part worth your attention, and it is not the oil price. The thirty-year Treasury yield went down this morning, by 1.4 basis points. The two-year went up, by 2.1. A supply shock the market expected to last would push the long end higher, because the long end is where a durable change in the price level gets expressed. It did the opposite. The bond market is pricing this as a hit to growth rather than a lasting rise in prices. It may be wrong. The next real evidence lands Friday at 8:30am Eastern, when the Bureau of Labor Statistics publishes the August Consumer Price Index. The September reading follows on October 14. ## The Case A hypothetical couple, both 51, in Raleigh. He owns a distribution business, she is a partner at a firm. Their taxable income lands at $520,000 this year, most of it W-2 and K-1. A distribution has left $400,000 sitting in a money market account and they want it in bonds. Two ideas come back. A thirty-year Treasury at 5.250%, which is this morning’s yield. A North Carolina municipal bond at 3.250%. The Treasury pays two full percentage points more. It is also the smaller cheque. ## The arithmetic Start with their marginal rate on a bond coupon. **Federal ordinary income, 35%.** The married-filing-jointly 35% band runs from $512,450 to $768,700 for 2026, per Revenue Procedure 2025-32. **Net investment income tax, 3.8%.** Interest is net investment income, and their modified adjusted gross income is far above the $250,000 threshold for a joint return. **North Carolina, 3.99%.** That is the rate for tax years after 2025, set by Session Law 2023-134. Now apply them. Treasury interest is exempt from state income tax. So the Treasury is taxed at 35% plus the 3.8% surtax, and nothing goes to Raleigh. $400,000 × 5.250% = $21,000 of interest $21,000 × 38.8% = $8,148 to the IRS **$12,852 kept.** In-state municipal interest is exempt from federal tax, is not net investment income, and is exempt from North Carolina tax because the issuer sits in state. Nothing is withheld at any level. $400,000 × 3.250% = $13,000 of interest **$13,000 kept.** The 3.25% bond pays this couple $148 a year more than the 5.25% bond. The breakeven is 3.213%. Any in-state North Carolina municipal above that number beats a 5.250% Treasury for them, before anyone has said a word about credit or duration. ## What the four of them would say **The portfolio manager.** These are not the same asset. A thirty-year Treasury is the deepest market on earth and the benchmark everything else is priced against. A single municipal issue carries one issuer’s credit and a bid-ask spread that can cost more on the way out than the yield advantage earns in a year. The tax comparison is correct, and it is one of three questions, not the only one. **The CPA.** The exemption is not universal. A municipal bond issued outside North Carolina is exempt from federal tax and fully taxable by the state, which moves the breakeven from 3.213% to 3.35%. Tax-exempt interest also still appears on the return, where other calculations can key off it. **The financial planner.** Settle location before selection. Inside a traditional IRA the entire calculation vanishes, because everything that comes out is ordinary income regardless of what earned it. A municipal bond in an IRA is an exemption thrown in the bin. The tax-equivalent question exists only in a taxable account, which is exactly where most people never think to ask it. **The estate attorney.** Look past this couple. The bond held in the taxable account passes to their children with a stepped-up basis. The same money inside a traditional IRA has never been taxed and does not step up: the income tax rides along to whoever inherits it. On a statement the two accounts look identical. To an heir they are not remotely the same asset. ## One more thing, and it is why this letter exists How quickly an heir has to empty an inherited IRA is governed by the SECURE Act. The IRS’s own beneficiary page, live on [irs.gov](https://www.irs.gov) this morning, still describes the pre-SECURE five-year rule and an age of 70 and a half. A page on [irs.gov](https://www.irs.gov) can be out of date. That is why every figure above names its document and its date, and why you should not take a number from anyone, this letter included, without the citation attached to it. ## Tomorrow The deferred compensation election most executives make once, in the year they are least able to predict what they will need. ## Sources 2026 federal rate tables and brackets: [https://www.irs.gov/pub/irs-drop/rp-25-32.pdf](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf) Net investment income tax and its thresholds: [https://www.irs.gov/individuals/net-investment-income-tax](https://www.irs.gov/individuals/net-investment-income-tax) North Carolina individual rate: [https://www.ncdor.gov/taxes-forms/individual-income-tax/tax-rate-schedules](https://www.ncdor.gov/taxes-forms/individual-income-tax/tax-rate-schedules) CPI release calendar: [https://www.bls.gov/schedule/news\_release/cpi.htm](https://www.bls.gov/schedule/news_release/cpi.htm) Hormuz strikes: [https://www.cnbc.com/2026/09/08/iran-us-sub-strait-hormuz.html](https://www.cnbc.com/2026/09/08/iran-us-sub-strait-hormuz.html) Photograph and licence: [https://www.dvidshub.net/image/9427720](https://www.dvidshub.net/image/9427720) The case above is a hypothetical illustration of published tax rates, built to show the arithmetic. It is not a projection, not a recommendation, and not advice about any security. Yields move daily and the municipal yield used is an assumption, not a quote. This letter is educational. Your own numbers, your own state and your own accounts will change the answer, so check them with your CPA and your attorney before you act. ## Sources - [The Nest Egg, original issue](https://retirement-wealth.beehiiv.com/p/why-the-5-25-bond-pays-less-than-the-3-25-one) --- Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.