Which type of bonds, issued by local governments, generally carries the lowest interest rate?

Municipal bonds are issued by local governments or their agencies and are specifically designed to fund public projects. One of the main reasons they typically carry the lowest interest rates among the bond types listed is due to the tax advantages they offer to investors. Interest income from municipal bonds is often exempt from federal income tax, and in some cases, state and local taxes as well. This tax exemption makes these bonds more attractive to investors, allowing issuers to offer lower interest rates while still attracting buyers.

Additionally, municipal bonds are generally viewed as having a lower risk compared to corporate bonds, which can fluctuate significantly based on the issuing company's performance. Government bonds, although also seen as low-risk, often yield higher interest rates than municipal bonds because they reflect broader governmental fiscal policies and budgetary needs. Similarly, agency bonds, which are issued by government-sponsored enterprises, may have higher risks or no tax advantages aligned with municipal bonds, contributing to their overall higher yields.

Overall, the unique tax benefits and lower perceived risk associated with municipal bonds result in their carrying the lowest interest rates among different bond types.