Municipal debt: A model of resilience
October 25, 2012
Defaults within the municipal bond market remain rare, even despite several notable cases of distressed cities in recent years.
It's important to learn about municipal bonds' historically defensive nature.
Municipal bonds have historically exhibited low default rates. During the 42 years ended December 2011, even bonds at the lower end of the investment grade spectrum experienced default rates of less than 1%. (Source: Moody's.)
Of the approximately 17,700 long-term municipal bonds rated by Moody’s from 1970 to 2011, 71 defaults were recorded, 11 of which were tallied in the two-year period following the 2008-2009 recession.
Default rates, 1970 – 2011*
|Municipal rated debt
||Bonds of the highest quality, generally posing the smallest degree of investment risk
||Bonds of high quality by all standards, though with a slightly higher degree of investment risk than Aaa-rated bonds.
||Bonds with many favorable investments qualities, though somewhat more susceptible to adverse economic conditions and are subject to low credit risk.
||Bonds of medium-grade quality, with adequate capacity to meet financial commitments but less reliability for the long term
|Below investment grade
||Bonds with speculative elements, ranging from moderately speculative to extremely speculative
*Calculated as average 10-year cumulative default rates.
Data: Moody’s Investors Service, September 2012, most recent data available.
Moody’s long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
Analysis only includes municipal bonds rated by Moody’s. Default rates shown are calculate as cumulative averages for the period shown between 1970 and 2011, for bonds in existence for at least 10 years. Chart is for comparative purposes only.
Past performance does not guarantee future results.
Important points to consider about the defensive nature of municipal debt:
- Unlike corporations, municipalities can't fold or liquidate.
- States put a high priority on servicing debt. A default on a debt obligation could paralyze a state’s access to capital markets.
- State and local governments are required by law to balance their budgets.
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and its summary prospectus, which may be obtained by visiting our fund literature page or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.
The Fund may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity, potentially forcing the Fund to reinvest that money at a lower interest rate.
High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.
Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.
Funds that invest primarily in one state may be more susceptible to the economic, regulatory, and other factors of that state than funds that invest more broadly.
Diversification may not protect against market risk.