Investors in municipal bonds purchase and/or trade the securities.
- Retail investors are the most prominent investors of municipal bonds, and own over 41% on average of all municipal bonds issued according to a SIFMA report issued in Q2 2022. The current report can be found on the SIFMA research website. Retail investors also tend to hold the securities until maturity. Individuals can buy municipal bonds through bond dealers, banks, and brokerage firms such as Fidelity. Investors can buy municipal bonds in both the primary market and the secondary market. The primary market is for newly-issued bonds, while the secondary market is for trading bonds after issuance.
- Mutual funds are the second-largest holders of municipal bonds.These funds own nearly 28% of municipal bonds issued. Individuals and firms can purchase shares of municipal bond mutual funds.
- Banks are also major municipal bond investors, although less so since the passing of the Tax Cuts and Jobs Act of 2017, which reduced their appetite for tax-exempt income. Bank ownership of municipal bonds is roughly 16%.
- Insurance companies are also major investors in municipal bonds, owning around 11%.
Example:
An issuer sells a $50 million tax-exempt bond issuance which has maturities from year 2 through year 30. Bond funds might be interested in the longer bonds because the longer the bond, the more price volatility, and the more potential gain should markets move and they sell the securities. Money market funds might be interested in the shorter maturities because they better fit their clients’ goals.
Individuals and insurance companies might be interested in the middle year maturities because they offer tax-exempt earnings and less volatility than the longer bonds and are therefore a safer investment.
What’s important here?
There are several reasons why investors purchase municipal bonds. For individuals, municipal bonds are commonly purchased for their tax-exempt income. Others purchase municipal bonds for their future trading value. Banks might purchase municipal bonds of local issuers to show their interest in the community. Insurance companies might buy municipal bonds for both the tax-exempt income and the reduced credit risk versus a corporate bond.