Municipal Bonds – Unique Asset Class
1. Low Default Rate
Municipal bonds have for a long time offered investors a safe Investment Vehicle. The 10 year cumulative default rate on municipal bonds was 0.04% between 1970 and 2000. By comparison, the 10-year default rate for corporate bonds over the same period of time was 9.83%. [Source: November 2002, Moody’s Investor’s Services.]
2. High Recovery Rate
Defaulted municipal bonds have a fairly high recovery rate of 68.33%. [Source: 2003, Fitch Findings.]
3. Large Market Size
$2.67 Trillion as of 12/31/2008. [Source: Investingbonds.com]
4. Generally, liquid secondary market for sizeable offerings.
5. Largest owners of municipals bonds.
High-net worth individuals, mutual funds, money market funds, property and casualty insurance companies and commercial banks. The 100 largest institutional holders represent approximately 35% of the entire municipal bond market. [Source: 2009, Thomson Reuters eMAXX]
6. Generally, High Grade Ratings
(A-/A3 or better by S&P and Moody’s.)
7. Surety credit enhancement of interest and principal over an underlying rating.
8. Attractive yield curve for tax-free and taxable municipal bonds.
9. Attractive spreads over U.S. Treasury bonds (AAA Rated tax-free municipals.)
1 year-194.949%; 5 year-113.567%; 10 year-107.915% [Source: November 2011, Bloomberg.]
10. Attractive spreads over U.S. Treasury bonds (AAA Rated taxable municipals.)
1 year-200%; 5 year-200%; 10 year-175% [Source: November 2011, Bloomberg.]
11. Attractive spreads over U.S. Corporate bonds (AAA Rated tax-free municipals.)
5 year-111%; 10 year-154% [Source: November 2011, Bloomberg.]
Default Rates
The historical default rate for municipal bonds is lower than that of corporate bonds. The Municipal Bond Fairness Act (HR 6308), introduced September 9, 2008, included the following table giving bond default rates up to 2007 for municipal versus corporate bonds by rating and rating agency. Cumulative historic default rates (in percent):
[Source: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_reports&docid=f:hr835.110]