![]() ![]() Different types of municipal bonds are secured by very different revenue sources with varying levels of predictability and stability. Our findings raise the question, What causes such markedly different default frequencies between rated and unrated municipal bonds? Our answer: Not all municipal bonds are created equal. (We don’t have complete information on the number of issues, so we can’t compare default rates.) In total, we find 2,527 defaults from the period beginning in the late 1950s through 2011. Similarly, our database indicates 2,366 defaults from 1986 to 2011 versus S&P’s 47 defaults during this same period. Rather than confirming Moody’s 71 listed defaults from 1970 to 2011, our database shows 2,521 defaults during this same period. We have developed a more comprehensive municipal default database by merging the default listings of three rating agencies (S&P, Moody’s, and Fitch) with unrated default listings as tracked by Mergent and S&P Capital IQ. However, not all municipal bonds are rated and the market’s rated universe only tells part of the story. As shown in the table below, this record of defaults compares very favorably with the corporate bond market, especially given the larger number of issuers in the municipal bond market. Similarly, Moody’s indicates that its rated municipal bonds defaulted only 71 times from 1970 to 2011. ![]() S&P reports that its rated municipal bonds defaulted only 47 times from 1986 to 2011. Two large bond rating agencies, Moody’s Investors Service (Moody’s) and Standard and Poor’s (S&P) provide annual default statistics for the municipal bonds that they rate. Although the low default history of municipal bonds has played a key role in luring investors to the market, frequently cited default rates published by the rating agencies do not tell the whole story about municipal bond defaults. municipal debt when $930 billion in mutual fund holdings is included, the household share rises to three-quarters. As shown below, individuals directly hold more than half, or $1.879 billion, of U.S. These two features have resulted in household investors dominating the ranks of municipal bond holders. municipal bond market is perhaps best known for its federal tax exemption on individuals and its low default rate relative to other fixed-income securities. This post describes the market and its risks. ![]() But the municipal bond market is complex and defaults happen much more frequently than most casual observers are aware. The last couple of years have witnessed threatened or actual defaults in a diversity of places, ranging from Jefferson County, Alabama, to Harrisburg, Pennsylvania, to Stockton, California.īut do these events point to a wave of future defaults by municipal borrowers? History—at least the history that most of us know—would seem to say no. In our recent post on the state and local sector, we argued that structural problems in state and local budgets were exacerbated by the recession and would likely restrain the sector’s growth for years to come. Jason Appleson, Eric Parsons, and Andrew F. ![]()
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