The following text is from CFA Curriculum:
Some jurisdictions exempt municipal bond interest or other types of interest from taxes. In this case, it could conceivably make sense to place tax-free munic- ipal bonds in a taxable account and more heavily taxed stock in the TDA. The yield on tax-free bonds, however, is generally much lower than those on taxable bonds so that in a well functioning market their after-tax returns are approxi- mately equal. This yield concession is a significant disadvantage to placing low yielding tax-free bonds in a taxable account and equity in a TDA. In most instances the yield concession more than offsets the value of sheltering equity returns from taxes. As a result, it is generally better to follow the general strategy of locating bonds in TDAs and equity in taxable accounts.
(Level III 2012 Volume 2 Behavioral Finance, Individual Investors, and Institutional Investors, 5th Edition. Pearson Learning Solutions p. 261). My question – since equities have higher expected returns shouldn’t equities be placed in TDA’s rather than bonds? Does the decision of whether to place equities or bonds in the TDA turn primarily on the fact that coupons are generally taxed higher than capital gains?