What type of risk do municipal bonds typically have?

Municipal bonds typically have credit risk as one of their main types of risk. Credit risk refers to the possibility that a bond issuer may default on its payment obligations, which can include failing to make interest payments or failing to repay the principal amount at maturity. Municipal bonds are issued by state and local governments, and while they are generally considered safe and may even come with tax advantages, they are not entirely free from this risk. Factors like the issuer's overall financial health and the economic conditions of the region can influence the likelihood of default.

Municipal bonds are typically thought to have less market risk compared to corporate bonds, as their prices are often more stable. However, they still experience interest rate risk—the risk that changes in prevailing interest rates will affect bond prices—but credit risk remains a primary concern for investors assessing the safety and reliability of these securities. Default risk is a more specific subset of credit risk and, although it is relevant, credit risk encompasses broader considerations that investors take into account when evaluating municipal bonds.