Tax-Free Energy Bonds Draw Billions From Yield-Hungry Investors

A complicated kind of debt deal is electrifying the muni market these days: prepaid energy bonds.

Last year investors bought $31.4 billion worth, three times as much as in 2022. If you buy a municipal debt index fund, energy bonds currently make up from 5% to 25% of your investment.

Here’s how they differ from regular munis. In a plain-vanilla general obligation bond, investors lend money to a government and rely on its taxing authority to pay it back. Or, in revenue bonds, investors get repaid through the money generated by an important project, such as a toll road, ...