Treasury bills, notes, and bonds may be exempt from state and local taxes, but they are fully taxable on the federal level.
Municipal bonds, on the other hand, are exempt from federal income tax. Municipal bonds also may be exempt of state and local income taxes for investors who live in the area where the bond was issued. However, if a bondholder purchases a municipal bond mutual fund that invests in bonds issued by other states, the bondholder may have to pay income taxes.
* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional. Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
Tip adapted from IRS.gov
 IRS.gov, September 4, 2020