Who else borrows in public — municipals, agencies and supranationals?
Between national governments and ordinary companies sits a large, quiet middle of the bond market: cities, states, government-sponsored agencies, and international institutions. They are less famous than either end and collectively enormous.
Municipal bonds
Municipal bonds ("munis") are issued by states, cities, counties, school districts, transit authorities and public utilities — usually to build something physical: a bridge, a water system, a hospital, a school.
Two structural types, and the difference matters:
- General obligation (GO) bonds — backed by the issuer's general taxing power. Repaid from the tax base at large.
- Revenue bonds — backed only by the revenue of the specific project. A toll-road bond is repaid from tolls. If traffic disappoints, the bondholder's recourse is limited to that project, not to the city's treasury.
The tax angle, and its arithmetic
In the United States, interest on most municipal bonds is exempt from federal income tax, and often from state tax for residents of the issuing state. This changes how the yield must be read.
Compare like with like using the taxable-equivalent yield:
Taxable-equivalent yield = tax-free yield ÷ (1 − marginal tax rate)
A muni yielding 3.5% for an investor in a 32% federal bracket:
3.5% ÷ (1 − 0.32) = 3.5 ÷ 0.68 = 5.15%
So a 3.5% muni is directly comparable to a 5.15% taxable corporate bond for that specific investor. Change the tax rate and the comparison changes entirely — at a 12% rate the same muni is equivalent to 3.98%. This is the clearest example in fixed income of a bond's value depending on who is holding it, and it explains why munis are dominated by high-tax-bracket domestic buyers and largely ignored by everyone else. Tax treatment varies by country, by state and by bond; this is an illustration of the arithmetic, not tax guidance.
Agency bonds
Agency bonds come from government-sponsored or government-owned institutions that borrow to fund a public purpose. In the US: Fannie Mae and Freddie Mac (housing finance), the Federal Home Loan Banks. In Germany: KfW (development lending). In many countries: export credit agencies and national development banks.
These typically yield slightly more than the sovereign — because the relationship to the state ranges from explicit guarantee to strong implication, and markets price that ambiguity. The 2008 conservatorship of Fannie Mae and Freddie Mac is the standing reminder that "implied" and "guaranteed" are different words for a reason.
Supranationals
Supranational bonds are issued by institutions owned by multiple governments: the World Bank, the European Investment Bank, the Asian Development Bank, the European Stability Mechanism. They lend for development and infrastructure across borders and fund themselves in global bond markets, frequently in several currencies at once.
Backed by the combined callable capital of member states, most carry the highest ratings available. They are also the main venue where large-scale green bonds and other labelled issuance got started — bonds whose proceeds are contractually earmarked for specified projects.
Reading the middle of the market
Slot the whole universe on one line, roughly ordered by the compensation each step demands for risk, complexity and difficulty of selling:
Sovereign → supranational → agency → municipal → investment-grade corporate → high-yield corporate
Each step adds some combination of default risk, complexity, and difficulty of selling, and each is compensated accordingly. Municipals are the exception that proves the point: their quoted yields sit below sovereigns, because the tax exemption you just computed is doing the work. They only take their place on this line once you convert them to a taxable-equivalent basis. That is the single organising idea of the bond universe — not a ladder to climb, just a map of what the extra yield is paying for.
Try it now
- Compute the taxable-equivalent yield of a 4.0% muni for investors in the 24% and 37% brackets. (5.26% and 6.35%.) Notice that the same bond is worth measurably more to one of them.
- Name the difference between a GO bond and a revenue bond in one sentence each, and say which one a toll road would issue.
- The table below holds six governments' credit ratings from the three large agencies. Pick two of very different grade (Germany and Colombia are the widest pair in it). Then reason about where each one's national development agency would likely sit relative to its own sovereign, an exercise in the "government yield + spread" logic from the previous lesson.