Who are the largest group that purchases tax-exempt bonds?

The largest group that purchases tax-exempt bonds is, in fact, institutional investors. Institutional investors, which include entities such as pension funds, insurance companies, and investment firms, typically allocate substantial capital to tax-exempt bonds due to their attractive features, such as safety and tax advantages. These bonds are designed to appeal to higher-income investors, who seek to minimize their tax liability, and institutional investors are often significant players in this market due to their investment strategies and the need to manage long-term liabilities with stable and tax-advantaged income.

While individuals can and do purchase tax-exempt bonds, they represent a smaller portion of the market compared to institutional investors, who have both the financial capacity and the investment mandates that align with purchasing such instruments. Corporations also participate in the bond market, but their investment in tax-exempt bonds is generally limited and often focused on specific tax strategies rather than being a primary investment avenue. Similarly, while mutual funds can be significant purchasers of tax-exempt securities, they are typically considered intermediaries that pool individual investments, rather than being the largest direct purchasers themselves. Overall, the overwhelming participation of institutional investors solidifies their role as the largest group in the tax-exempt bond market.