Municipal bonds — debt obligations issued by states, cities, counties, school districts, and other governmental entities — are one of the largest segments of the U.S. fixed-income market. Municipalities issue bonds to finance capital projects including roads, schools, water systems, hospitals, and airports. The defining feature of most municipal bonds is federal income tax exemption on interest income, which drives demand from high-bracket individual investors and creates a distinct pricing dynamic relative to taxable fixed-income markets.
Municipal bonds are broadly categorized as general obligation (GO) bonds or revenue bonds. GO bonds are secured by the full faith and credit of the issuing municipality — backed by its taxing authority. Revenue bonds are repaid from the revenues generated by the project being financed (e.g., toll roads, utilities, airports). Revenue bonds carry project-specific risk and are analyzed differently than GO credits.
The Municipal Securities Rulemaking Board (MSRB) regulates the municipal securities market and operates the Electronic Municipal Market Access (EMMA) system, which provides free public access to official statements, continuing disclosures, and trade data. Credit analysis of municipal bonds relies heavily on MSRB EMMA disclosures, Comprehensive Annual Financial Reports (CAFRs), and rating agency assessments.
Municipal credit quality varies widely across issuers. General obligation bonds from fiscally strong states and major cities typically carry high ratings; smaller or financially stressed municipalities may carry speculative-grade ratings or be unrated. Pension liabilities, unfunded OPEB obligations, and structural budget imbalances are primary credit concerns in GO analysis.
Sources: MSRB (msrb.org); Federal Reserve Z.1 Financial Accounts; SEC Municipal Securities Disclosure Rules.