Municipal bonds: untapped potential in ESG strategies | Insight Investment

Quick guide to US Municipal bonds

US municipal bonds, also known as muni bonds or munis, are bonds issued by US states, cities or local government bodies. They can take the form of general obligation (GO) bonds, funded via tax revenues, or revenue bonds, secured by an income stream from a specific local infrastructure asset. Historically, this has meant that default rates have been low, making munis an attractive investment for risk averse investors, and a way to diversify away from corporate bond holdings.

The majority of municipal bonds are issued in a format that exempts the holder from US federal income tax, and potentially local state taxes – a significant benefit for many US-domiciled citizens and corporates. However, there is a growing section of the municipal bond market that is issued in a fully taxable format – by issuing fully taxable debt, the issuer has greater flexibility on how they can use the proceeds. Taxable municipal bonds generally trade with a higher gross yield than their tax-exempt counterparts, and this has led to an increase in demand from non-US investors.