Bonds sold by U.S. states and localities are special for a few reasons. For one, they trade in a market unlike any other. Few other countries in the world have devolved as much autonomy to sub-sovereign entities as the United States. This autonomy allows states and localities to levy taxes and borrow money in ways that governors and mayors in other countries can only imagine. Another, of course, is the tax exemption. Investors don’t pay federal or (usually) state income taxes on the interest earned from holding municipal bonds (munis).

These two features make the muni market highly localized. Given that, it seems odd that munis would attract any attention from international investors. After all, they can’t realize the tax benefits if they don’t have U.S. income tax liability. And if they don’t know the local community, why would they care to invest in it? But it turns out that international investors are a growing share of the muni market.

• Publication date: April 2021
• Author: Justin Marlowe