Moody’s describes this as demonstrating that “willingness to repay debt can overcome many obstacles, including, in this case, small scale and near total destruction.” Continuing Stability for Muni Bonds This year’s report notes the “continued absence of rated defaults due to natural disasters” as an “interesting trend.” Although the small town of Paradise in California was nearly destroyed, it has continued to make its bond payments. While legal security will influence recovery, credit fundamentals drive defaults.”

Vis-à-vis Puerto Rico, Moody’s notes in its report that “several more Puerto Rico credits that initially defaulted in 2015-17 have begun recovery in March 2022.” And that “the history of the litigation and recoveries for the Commonwealth's debts … broadly is a reminder of the power of credit fundamentals, such as leverage, operational balance, and economic capacity, over ostensible security features written on paper. This is especially true compared to the five-year default rate of 7.2% in 2012 and 6.8% in 1970 for global corporates. The report drew attention, once more, to the fundamental difference between municipal and corporate credits.Įven though the average five-year municipal default rate since 2012 has been 0.1%, compared to 0.08% throughout the study period (1970-2021), it remains extremely low. Muni Bond Defaults and Bankruptcies More Common, but Remain Rare In relation to the effects of the pandemic, Moody’s notes that, in addition to the acceleration of remote learning and work and the associated movement away from high-density employment and living, there are not only public health impacts but also “potential longer-term effects for K-12, higher education and the mass transit sector…” All these bear watching in the context of the municipal bond market. Once again, an important observation noted in this year’s report was that over the 52-year study period: “Any one default may only reflect the idiosyncrasies of that individual credit, and may not represent a general sector trend.” However, even though they may have stabilized during 2021, according to Moody’s, cumulative default rates have increased since 2010.

(Indeed, there were no new rated municipal bond defaults during the period of significant market stress in 2021 resulting from COVID.) Second, muni bonds continue, on average, to be highly rated compared to corporates. First, while they may have become more common over the last 15 years, municipal defaults and bankruptcies remain rare overall. In addition to noting that the muni sector continued to recover from the effects of COVID-19, the report also affirms two hallmark benefits muni bonds offer. At the end of April, Moody’s Investors Service released its annual municipal bond market snapshot, US municipal bond defaults, and recoveries, 1970-2021, with updates through 2021.

Municipal bond defaults