Municipal debt: A model of resilience
April 20, 2012
Municipal bonds have historically exhibited low default rates. During the 41 years ended December 2011, bonds at the lower end of the investment grade spectrum experienced default rates of less than 1%.
More recently — in the two-year period after the recession of 2008-2009 — Moody's recorded a mere 11 defaults on long-term municipal bonds that fell within its entire ratings universe.
Default rates, 1970 to 2011*
|Municipal rated debt
|Below investment grade
*Calculated as average 10-year cumulative default rates.
Data: Moody’s Investors Service, March 2012.
Analysis only includes municipal bonds rated by Moody’s. Default rates shown are calculated 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.
Important points to consider about the defensive nature of municipal debt:
- Municipalities can’t pull up stakes when conditions are tough. Governments must continue to exist.
- States put a high priority on servicing debt. A default on a debt obligation could paralyze the state’s access to capital markets.
- State and local governments are required by law to balance their budgets.
Definitions for Moody's ratings:
- Aaa – Bonds of the highest quality, generally posing the smallest degree of investment risk.
- Aa – Bonds of high quality by all standards, though with a slightly higher degree of investment risk than Aaa-rated bonds.
- A – Bonds with many favorable investments qualities, though somewhat more susceptible to adverse economic conditions.
- Baa – 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.
Charting a path through municipal bond markets
The municipal market, as measured by the Barclays Municipal Bond Index, has had a strong start in 2012, posting positive total returns across all maturity buckets, rating tranches, and sectors.
Talk to your financial advisor to determine whether investing in municipal bond funds may help you keep more of your income as you maintain a well-diversified portfolio suitable for your investment goals.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting the 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.
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.
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.
Diversification may not protect against market risk.
The Barclays Municipal Bond Index measures the total return performance of the long-term investment grade tax-exempt bond market.
Indices are unmanaged, and one cannot invest directly in an index.