Can I Buy Municipal Bonds Directly?

Municipal bonds are debt instruments issued by state and local governments to secure funding for public projects like schools, hospitals, and roads. Individuals can purchase these bonds directly, bypassing intermediaries.

Understanding Municipal Bonds

Municipal bonds enable state and local governments to finance public works and services. When an investor buys a municipal bond, they lend money to the issuer. The issuer promises to repay the principal on a maturity date, plus regular interest payments.

Two main categories exist: General Obligation (GO) bonds and Revenue bonds. GO bonds are backed by the issuer’s general taxing power, such as property or sales taxes. This taxing ability assures repayment.

Revenue bonds are backed by revenue from the specific project they finance, not general taxing power. For example, toll road bonds are repaid from tolls, and water utility bonds from usage fees. The project’s financial success directly ties to the bond’s repayment.

Interest on municipal bonds is generally exempt from federal income tax. If the bondholder lives in the issuing state, interest may also be exempt from state and local income taxes, offering a “triple tax-exempt” benefit. However, some municipal bonds, like private activity bonds, may have interest subject to the Alternative Minimum Tax (AMT).

Direct Purchase Avenues

Individuals can acquire municipal bonds directly without a full-service broker. These methods require greater personal responsibility for research and execution.

New issue offerings are one direct purchase method. Some governmental entities, especially for smaller projects, offer bonds directly to the public through their finance department or a local bank. Larger issues are handled by underwriting syndicates, which sometimes include a “retail order period” for individual investors before the general offering. Identifying these opportunities requires monitoring public announcements from municipal finance departments or bond counsel.

Online brokerage platforms are another common direct purchase method. Many self-directed platforms offer access to municipal bonds in the secondary market. Investors can search for bonds by issuer, maturity date, coupon rate, and credit rating, then place buy orders directly. These platforms facilitate transactions but operate on an execution-only basis, meaning investors are responsible for their decisions and due diligence.

The Electronic Municipal Market Access (EMMA) website, operated by the Municipal Securities Rulemaking Board (MSRB), is a useful online resource. While not a trading platform, EMMA provides free public access to official statements, trade data, and disclosures about municipal bonds. Investors use EMMA to research bonds, verify details, and understand an issuer’s financial health before purchasing through a brokerage or other avenue.

Information to Evaluate Before Buying

Before buying a municipal bond directly, evaluate specific information to make an informed decision. This analysis focuses on the bond’s characteristics and the issuer’s financial standing.

The Official Statement (OS) is the primary disclosure document for new bond issues and is important for due diligence. It details the bond’s purpose, terms, issuer’s financial condition, legal opinions, and tax implications. Key sections to review include the bond’s security, issuer’s debt, and financial statements, providing a comprehensive overview.

Credit ratings from agencies like Standard & Poor’s, Moody’s, and Fitch assess an issuer’s creditworthiness and ability to meet obligations. Higher ratings (e.g., AAA, AA) indicate stronger financial position and lower risk, while lower ratings suggest higher default risk. These ratings are an important factor in gauging safety.

Understanding the bond’s specific terms is also important. The maturity date indicates when principal is repaid, and the coupon rate is the fixed interest rate, typically paid semi-annually. Investors should check for call provisions, which allow the issuer to redeem the bond early, potentially impacting yield. Reviewing the bond’s yield (e.g., yield to maturity, yield to call) estimates total return.

Beyond credit ratings, assess the issuer’s financial health by reviewing recent financial reports, budget documents, and economic outlook. For revenue bonds, examine metrics like debt service coverage ratios, which show the project’s ability to generate revenue for debt payments. This helps confirm the issuer’s capacity to honor commitments. Finally, verify the bond’s tax status. While many municipal bonds offer federal tax-exempt interest, some bonds may have interest subject to the AMT or be fully taxable.

The Direct Purchase Process

Once an investor evaluates information and decides on a municipal bond, the purchase involves several steps.

The first step for many direct buyers is setting up an investment account with an online brokerage platform offering municipal bonds. This involves completing an application, providing identification for regulatory compliance, and linking a bank account for funding. Funds can be transferred via electronic transfers (ACH), wire transfers, or mailed checks, with processing times varying.

After the account is established and funded, locate the desired bond on the platform. Municipal bonds are identified by a CUSIP number, a nine-character alphanumeric code. Using the CUSIP, or searching by issuer, maturity date, or coupon rate, allows investors to pinpoint the exact bond. Municipal bonds are commonly issued and traded in $5,000 par value increments, though minimums vary.

Placing an order involves specifying the desired quantity, usually in par value (e.g., $5,000 or $10,000). Investors can place a market order (executes immediately at best price) or a limit order (specifies maximum price). A limit order ensures price control but may not fill if the price isn’t met.

After order placement, the transaction enters settlement. For municipal bonds, the standard settlement period is T+1. This means the bond transfers to the buyer’s account and cash to the seller’s one business day after the trade date. This shortened cycle, effective since May 28, 2024, reduces market risk and increases efficiency.

After settlement, investors receive a trade confirmation statement, typically sent electronically or by mail. This document details the transaction, including the bond’s CUSIP, par value, price, accrued interest, and any fees. Maintaining records of all transactions, annual statements, and Form 1099-INT is important for financial management and tax reporting.