Putnam Tax Exempt Fixed Income Team, March 16, 2012
We believe municipal bond investments are potentially quite attractive: Defaults have remained low, contrary to overblown predictions in the media; spreads are attractive on a historical basis; and muni/Treasury ratios are still above historical averages.
Defaults in the municipal bond market are generally misunderstood. While defaults do happen, they occur with far less frequency than in the corporate bond market, and more often than not, they are confined to particular sectors of the market, typically in land development deals or unrated securities.
While municipal defaults have ticked up recently, it is important to note that the predicted massive number of defaults has not materialized. Nearly one year ago, one well-known analyst predicted 50 to 100 sizeable defaults, totaling hundreds of billions of dollars. Those fears are proving to be unfounded. In fact, muni defaults are only minimally higher than their 20-year peak in 1991 and are outpaced historically at every rating level by corporate bond defaults (Source: Moody’s Investors Service, U.S. Municipal Bond Defaults and Recoveries, 1970-2009, February 2010). This is not to say that there will not be future defaults in the municipal market; there will be. But the fundamental budget stress at the heart of the current struggles will slowly ease as the fiscal measures being put into action by the states and municipalities begin to take effect and as the U.S. economy continues to improve.
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