These 2 Muni Funds Invest Where Most Separate Accounts Don’t

The surge in demand for separately managed accounts has reshaped the municipal bond landscape. As SMA assets have ballooned, concentrated buying in short- to intermediate-maturity bonds has compressed muni/Treasury yield ratios to levels that make the front end of the curve look overpriced. By June 2026, AAA rated munis inside 10 years, particularly those inside five years, were yielding less than comparable Treasuries on an aftertax basis, a sign that demand has overwhelmed supply.

The muni/Treasury ratio is a straightforward gauge of relative cheapness. When it is low, munis are expensive relative to Treasuries; when elevated, the tax-exempt market offers more compelling value. For the zero- to three-year part of the curve, the ratio has averaged 68% over the trailing five years ended August 2026. Today, it sits at 62%, below that long-term norm.

This is where alternative minimum tax bonds enter the picture. These munis, typically issued for airports, toll roads, and similar private-activity purposes, offer higher yields because their interest can trigger AMT liability for some investors. Because most SMA platforms exclude AMT paper to keep client tax reporting clean, these bonds trade at a persistent yield premium to comparable non-AMT issues. Active managers with the flexibility to own AMT bonds can tap into a part of the market that most SMAs leave on the table.

Let’s take a look at two funds in the muni-national intermediate

T. Rowe Price Intermediate Municipal Bond PRSMX, which earns a Morningstar Medalist Rating of Silver, is one such example. The fund held 17.0% of assets in AMT bonds as of June 2026, roughly 7 percentage points above the category average, giving it meaningful exposure to a segment of the muni market where elevated SMA demand has left behind a persistent yield premium. That positioning is not a one-off macro call, but rather an extension of the fund’s research-intensive, bottom-up approach to the intermediate muni market.

The broader portfolio remains disciplined. James Lynch, who joined T. Rowe Price in 2008 and became comanager in June 2024, now leads the strategy following veteran manager Charlie Hill’s retirement in 2025. The team emphasizes security selection and sector allocation rather than making big duration (a measure of interest rate sensitivity) bets, avoids leverage, and does not rely on heavy allocations to the riskiest credits to boost yield. Instead, it pairs midquality exposure, including meaningful overweighting in airport and healthcare revenue bonds, with a sizable position in high-quality AA munis, while keeping duration close to the Bloomberg Municipal 1-15 Year Blend Bond Index (1-17 Year Maturity).

Gold-rated Fidelity Intermediate Municipal Income FLTMX is another fund that leans into the AMT opportunity. The team follows a bottom-up approach reliant on deep credit research to identify mispriced opportunities. The analysts assess bonds through multiple lenses, including credit quality, structural traits such as coupons and call features, and dislocations along the maturity curve. Their research often leads them to favor revenue bonds with financial flexibility and premium callable bonds that carry higher coupons and less interest rate sensitivity. Reflecting this approach, roughly 18.5% of assets were in AMT-subject bonds as of June 2026, about 8 percentage points above the category average.

The fund balances that flexibility with a risk-aware approach. Cormac Cullen, Elizah McLaughlin, and Michael Maka have comanaged the strategy for around five years, backed by an 11-member analyst group and three dedicated muni traders. The team avoids instruments that can add volatility, such as tender-option bonds and derivatives, and keeps duration close to the Bloomberg 3-15 Year Blend Municipal Bond Index.