Rieger, James & Cling T. January 2015 Fixed Income Update: The U.S.
Municipal Bond Default Rate Hits 3 - Year High in 2014: 0.17 %
Based on the index data, the high - yield
municipal bond default rate also jumped from 0.807 % to 1.264 % in 2014.
By keeping bonds in the benchmark even when a default occurs, the index has become a living timeline, allowing us to track
the municipal bond default rate.
So far, the S&P
Municipal Bond Default Index is in negative territory with a return of -1.54 %.
Despite highly publicized defaults such as Puerto Rico and Detroit,
the municipal bond default rate remains low.
If and as the Puerto Rico bonds default it can be expected that they will be added to the S&P
Municipal Bond Default Index during a monthly index rebalancing and if they do they may have a significant weight in this index.
The S&P
Municipal Bond Default Index tracks municipal bonds that have entered default by not paying all or part of the promised principal or interest when due.
The risks: Despite some high - profile
municipal bond defaults, such as the 1994 default by California's Orange County, the vast majority of state and local bond issuers repay their debts as promised.
Not exact matches
Daniel Hanson, an analyst for Height Securities, told Morning Consult that the current
default likely won't have a major effect on the
municipal bond market because its effects were already «priced in» ahead of time.
Eliminating Puerto Rico's debts could raise interest rates on
bonds to insulate against potential
defaults, and subsequent debt elimination, on
municipal bonds.
Although
default risk is typically low, there are high - yield
municipal bond funds that increase credit risk.
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Municipal bonds can also help insulate your portfolio against market volatility, and tend to have lower
default risk than corporate
bonds.
The Fidelity Defined Maturity Funds hold from 40 to 70 Investment Grade
municipal bonds so as to minimize
default risk.
LB: With the
default rate on
municipal bonds being so low, is the benefit of diversification worth 100 BPS (1.0 %) in fees?
While
defaults are rare in the
municipal bond market (less than half of 1 percent) they do happen.
In the
municipal bond investing world, you do not get paid well for taking
default risk.
Since 1970, when they began tracking
defaults, the rate is even lower at 0.07 %.2 Compare that to global corporate
bonds, which
defaulted at a 2.06 % rate in 2016.3 It's important to note that the overall muni rate remained that low despite 2016 having the highest
municipal defaults volume on record, all related to Puerto Rico.
James Lyman, director of
municipal bond research at Manhattan - based Neuberger Berman, then testified that the town should have alerted his firm to an acceleration clause, which required the town to pay the entire loan within 60 days of a
default.
Since the crash, a down - spiral is underway in the $ 2.8 trillion
municipal - funding system, in which local governments don't have the revenue to meet
bond payments, they can't get new financing,
municipal bond rates are rising, and, to worsen it all, crazy credit
default swap deals have been foisted on localities.
Last year, 187 U.S.
municipal bond issuers officially
defaulted, on a total of $ 6.4 billion — almost half of which was from 122 real estate projects in Florida.
«Statistically» this year to date, «only» 30
municipal issuers have officially
defaulted on $ 1.5 billion in
bonds, but thousands of government authorities are in de facto
default on payments, and madly scrambling for re-negotiation, or forebearance, or blind hope.
In 2014, the
default rate of the S&P
Municipal Bond Index rose for the first time since 2011, finishing the year at 0.17 %.
Tyler oversees senior loan,
municipal bond and credit
default swap indices globally.
Thew book takes you through what you would do in order to preserve purchasing power in a
bond portfolio through a crisis where there are significant
municipal defaults amid inflation.
Without going into too much detail of statistics and standard deviation, I can tell you that there is a lot of research evidencing less than a 0.5 %
default rate for investment grade
municipal bonds for the last few decades.
Since 1970, when they began tracking
defaults, the rate is even lower at 0.07 %.2 Compare that to global corporate
bonds, which
defaulted at a 2.06 % rate in 2016.3 It's important to note that the overall muni rate remained that low despite 2016 having the highest
municipal defaults volume on record, all related to Puerto Rico.
Sectors within the
municipal bond market are each unique and have their own set of risks and that holds true for
defaulted bonds.
In 2015, 10 - year cumulative
default rates stood at 0.24 % for
municipals vs. 11.16 % for corporate
bonds, according to data from S&P.
The corporate
bond market is currently enjoying a period of lower historical
default rates while the
municipal bond market is wrestling with the largest
default in it's history — Puerto Rico.
Unlike corporate
bonds or
municipal bonds, Treasuries are considered to have a zero chance of
default; markets assume that the U.S. will always make good on its financial obligations.
Investment Grade: is a rating that indicates that a
municipal or corporate
bond has a relatively low risk of
default.
Historically, very few
municipal bonds have
defaulted, with a record of safety second only to that of U.S. Treasury securities.
Although
default risk is typically low, there are high - yield
municipal bond funds that increase credit risk.
the disclosure of certain enumerated events affecting a
municipal security; these events include the following, if material: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves; (4) unscheduled draws on credit enhancements; (5) substitution of credit or liquidity providers; (6) adverse tax events affecting the tax - exempt status of the security; (7) modifications to rights of securities holders; (8) bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment; (11) rating changes; (12) failure to provide annual financial information as required; the MSRB, Electronic Municipal Market Access (a.k.a. EMMA) provides free access to municipal disclosures, market data and
municipal security; these events include the following, if material: (1) principal and interest payment delinquencies; (2) non-payment related
defaults; (3) unscheduled draws on debt service reserves; (4) unscheduled draws on credit enhancements; (5) substitution of credit or liquidity providers; (6) adverse tax events affecting the tax - exempt status of the security; (7) modifications to rights of securities holders; (8)
bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment; (11) rating changes; (12) failure to provide annual financial information as required; the MSRB, Electronic
Municipal Market Access (a.k.a. EMMA) provides free access to municipal disclosures, market data and
Municipal Market Access (a.k.a. EMMA) provides free access to
municipal disclosures, market data and
municipal disclosures, market data and education
That's because — unlike the alphabet soup of
bonds, like CDOs and MBSs, that have been causing all the trouble in the credit markets —
defaults in
municipal bonds are practically unheard of.
For instance, Puerto Rico's fiscal distress was pretty well telegraphed and thus the broad
municipal bond market barely budged when they
defaulted on their debt or now as their
bonds fall further.
An investment grade is a rating that indicates that a
municipal or corporate
bond has a relatively low risk of
default.
*
Municipal bonds can also help insulate your portfolio against market volatility, and tend to have lower
default risk than corporate
bonds.
Municipal bonds are one of the safest investments you will find with an average
default rate of 0.07 % between 1970 and 2016, according to an annual study by the Moody's credit agency.
A credit
default swap is the most common form of credit derivative and may involve
municipal bonds, emerging market
bonds, mortgage - backed securities or corporate
bonds.
Combining this data reveals a definitive trend: Historically,
municipal bonds have had a lower propensity to
default.
But even in the depths of the great depression,
defaults of
municipal bonds remained relatively low.
The corporate
bond sector of the
municipal bond market has historically been one of the sectors where
bonds have a higher propensity to
default.
While
municipal bonds were once viewed as almost risk - free, their reputation is now less sterling, thanks to
defaults by Puerto Rico, Detroit and others.
Some
municipal bonds are insured by outside agencies, usually a monoline insurer, which promises to pay the interest and principal if the
bond's issuer
defaults.
The
default rate for
municipal bonds is much much lower than it is for corporate
bonds.
For the period 2007 to 2016, which includes the recession, the five - year
default rate for
municipal bonds was 0.15 %, compared with 6.92 % for corporate
bonds.
In the past 50 years, less than one percent of the hundreds of thousands of
municipal bonds issued have gone into
default.
Unlike corporate
bonds, the governmental nature of
municipal bonds lowers the risks associated with them, but it is still potentially possible for a municipality to go bankrupt and
default on a
bond.
If we do keep shrinking into a depression, even the
bond investing and savers will get impacted, many of the AAA
bonds and
municipal bonds may go into
default.