Who Sells Municipal Bonds and How Do You Buy Them?

Municipal bonds are debt securities issued by various governmental entities to fund public projects and daily operations. When an investor purchases a municipal bond, they are essentially lending money to the issuer. In return, the issuer promises to make regular interest payments and return the original principal amount at a specified maturity date. These bonds offer investors a way to generate income while contributing to the development of community infrastructure.

Issuers of New Municipal Bonds

State and local governments, along with their agencies and authorities, are the direct entities responsible for issuing new municipal bonds. Entities such as state governments, cities, counties, school districts, and public utility districts frequently issue bonds.

The funds raised from these bonds support infrastructure development, including roads, bridges, and sewer systems. They also finance essential public services like schools, hospitals, and transportation networks. For example, a city might issue bonds to construct a new school or repair existing water treatment facilities.

These newly issued bonds are typically sold in the “primary market.” Initial offerings are often made to large institutional investors, such as mutual funds and pension funds, or distributed through underwriting syndicates composed of investment banks.

Financial Institutions Selling Existing Bonds

Most individual investors acquire municipal bonds in the “secondary market,” where previously issued bonds are traded among investors. Prices in this market can fluctuate based on factors such as current interest rates, the bond’s credit rating, and overall market demand.

Broker-dealers, investment banks, and online brokerage platforms are the primary financial institutions facilitating these secondary market transactions. Broker-dealers often act as intermediaries, connecting buyers and sellers, while also maintaining inventories of bonds to offer liquidity. They may apply a markup on purchases and a markdown on sales to cover their services. Many banks and independent financial advisors also offer municipal bonds to their clients as part of comprehensive investment services, guiding them through available options.

Purchasing Municipal Bonds

Individual investors purchase municipal bonds through a brokerage account, which can be established with an online platform or a full-service brokerage firm. While direct purchases from municipal issuers are uncommon for individual investors, they are occasionally possible for very large, local offerings. The most practical approach involves utilizing established financial intermediaries.

Investors should review details such as the bond’s credit rating, yield, and maturity date to ensure it aligns with their financial goals. Once a suitable bond is identified, an order can be placed through the brokerage.

It is important to understand the tax implications of municipal bond interest. Interest earned on most municipal bonds is exempt from federal income tax. Additionally, interest may be exempt from state and local taxes if the investor resides in the state where the bond was issued. Some municipal bonds, such as certain private activity bonds, may be subject to the federal Alternative Minimum Tax (AMT).

For those seeking diversification or with smaller investment amounts, municipal bond mutual funds and exchange-traded funds (ETFs) offer an alternative. These funds pool money from many investors to buy a diversified portfolio of municipal bonds, providing professional management and often lower minimum investment requirements, typically around $5,000 for individual bonds. Investing in these funds can reduce the risk associated with holding a single bond and simplify the investment process.