Understanding where to buy municipal bonds is essential for investors seeking Tax-advantaged income and broad portfolio diversification. The process involves multiple channels, ranging from primary market participation in new issuances to secondary market access through dealers, brokerage platforms, and electronic trading networks, all with varying degrees of transparency, liquidity, and costs.
Who This Is For & Suitability
Investors looking for income exempt from federal, and often state/local, taxes.
Individuals seeking to diversify fixed-income holdings beyond Treasuries and corporates.
High net-worth investors or those in high tax brackets who benefit most from the tax-equivalent yield.
Buyers comfortable evaluating credit risk, duration, yield to maturity (YTM), and liquidity tradeoffs.
Those able to hold bonds to maturity or manage the risks of selling before maturity.
Key Facts (At-a-Glance)
Item
Details
What a Municipal Bond Is
Loan to state/local government or agency, paying periodic coupons; most are tax-exempt at the federal level.
Issuers
States, cities, counties, school districts, agencies, and authorities.
Coupon Structure
Fixed, variable/floating rate, or zero-coupon; payment frequency typically semiannual.
Pricing
Quoted as a percentage of par (e.g., $1000); clean price excludes accrued interest.
Yield Measures
Current yield, yield to maturity (YTM), yield to worst (YTW), tax-equivalent yield.
Risk Metrics
Duration, convexity, credit rating, callable/putable features, sinking fund provisions.
Settlement
U.S. norm is T+1 (trade date plus one business day).
Taxes
Federal exemption common; state/local rules vary; alternative minimum tax (AMT) may apply for some bonds; interest reported to IRS.
Buy existing municipal bonds through broker-dealers with access to inventory or on request.
Most major online brokerage accounts (e.g., Fidelity, Schwab, Vanguard, E*TRADE, Merrill) provide search and order functionality for munis—minimums typically $1,000 to $5,000 per bond.
Trade electronic platforms such as Tradeweb (official) serve institutional clients, while some aggregators and dealers offer retail access.
Mutual funds and ETFs for municipal bonds allow diversification and professional management. Examples include funds like the Vanguard Tax-Exempt Bond ETF or iShares National Muni Bond ETF. Purchasable through standard brokerage accounts.
Consider differences between closed-end and open-end funds, and pay attention to NAV, expense ratio, and SEC yield.
Direct Programs and Local Banks:
Some local banks or trust departments offer access to local municipal securities or “bank-qualified” bonds, including potentially for smaller denominations.
Check if your state’s Treasurer or a local issuer has a retail program, especially for small or “mini” bond offerings.
Costs, Taxes & Disclosures
Trading Costs: Bid-ask spreads and dealer markups/markdowns typically higher than for Treasuries (“sample/illustrative” markup: $5–$10 per $1,000 face value, but wide range possible depending on liquidity and market conditions).
Commissions: Some brokers charge per-trade or per-bond fees (“sample/illustrative”: $1–$2 per bond or minimum commission per trade); others embed costs in price.
Accrued Interest: Pay or receive accrued coupon interest on settlement, depending on whether the bond pays periodic interest.
Taxes: Interest income is federally tax-free, but may be subject to state or local tax outside the issuing jurisdiction. Capital gains from selling bonds at a profit are taxable. Some bonds are subject to AMT.
Official Disclosures: Always review the official statement or offering document via MSRB EMMA (official); financials and continuing disclosures can influence credit risk and investment suitability.
Credit and Default Risk: Downgrade or payment risk, measured via credit ratings (investment grade vs high yield or below investment grade).
Liquidity Risk: Some bonds trade infrequently, which may affect resale value and execution price (use MSRB EMMA/FINRA TRACE to gauge trading activity).
Call/Reinvestment Risk: Callable bonds may be redeemed early, requiring reinvestment at potentially lower rates. Yield to worst (YTW) is relevant.
Tax/Policy Changes: New legislation or local fiscal issues can impact the value or tax treatment of municipal securities.
Event Risk: Changes in issuer financials or significant economic events (e.g., natural disaster) can increase credit or market risk.
Alternatives & Comparisons
Side-by-Side: Individual Municipals vs Munis Funds/ETFs vs CDs/Money Markets
Feature
Individual Munis
Munis Funds/ETFs
CDs/Money Markets
Access
Dealer, broker, new issue
Broker; fund sponsor platform
Banks, brokers
Denomination
$1,000 minimum typical
Shares, as low as $1
$1+ (CD); money markets $1+
Liquidity
Market-dependent, some thinly traded
Daily (open-end); intra-day (ETF)
Easy for money market; early CD withdrawal may have penalty
Tax Advantages
Interest federally tax-free; state may vary
Similar; fund income passes tax exemption
No tax exemption (except for certain state/muni-linked MMFs)
Diversification
Single issuer/exposure
Broad pool, lowers idiosyncratic risk
N/A beyond FDIC insurance
Fees
Dealer markup, possible commission
Expense ratio, bid/ask spread for ETFs
Bank/CD fees, minimal for MMFs
Information Access
MSRB EMMA, prospectus, broker
Prospectus, fund website, FINRA/SEC
Bank/CD documents
Yield/Return
Varies by bond/market, can lock in at purchase
Portfolio-weighted, fluctuates
Usually lower due to liquidity/insurance
How to Evaluate a Municipal Bond (Foundations)
Issuer, obligor, and use of proceeds (essential for credit analysis).
Broker platforms often provide summaries of trading activity.
What fees should I expect when buying municipal bonds?
Typical costs include dealer markups/markdowns and sometimes per-bond or per-trade commissions—review your broker’s specific fee schedule (“sample/illustrative” ranges provided above).
There may be accrued interest due at settlement.
Are municipal bonds always exempt from state or local taxes?
No; many but not all issues are exempt for residents of the issuing state. Non-residents may face state taxation or AMT liability.
Review the bond’s official statement for taxation details or consult IRS/state tax guidelines.
What are the minimum purchase amounts?
Most municipal bonds are sold in $5,000 denominations, but some offer $1,000 increments, especially in the secondary market.
Bond funds and ETFs require only the share or unit minimum for purchase.
Conclusion & Next Steps
Buying municipal bonds involves choosing the right channel—primary issuance, secondary market via dealers/brokers, or through funds/ETFs—while understanding the mechanics, costs, and risks.
Use official sources like MSRB EMMA (official) and FINRA TRACE to research bonds, check recent trades, and access disclosures.
Before purchasing, confirm current rules, listing requirements, and tax treatment for your state and fiscal year on official platforms or with a qualified tax advisor.
Stay informed about credit conditions, liquidity trends, and regulatory developments through regulator portals and periodic disclosures.
