January 11, 2022
Historically, municipals have experienced fewer defaults with better average recovery values than corporates across the credit spectrum. Defaults also have highlighted one significant contrast between the high yield and investment grade markets. If we examine the Moody’s rated issuer default history going back to 1970, which shows a significant increased risk of default for investors in the BBB-rated and below-investment-grade for taxable issues versus the BBB-rated and below-investment-grade tax-exempt issues, the much stronger credit profile for municipal bonds can be seen.
Municipals vs. corporate-rated debt
10-year average, cumulative issuer-weighted default rates Moody’s rated debt only (1970-2020*)
|
Municipal-rated debt |
Corporate-rated debt |
| AAA |
0.00% |
0.35% |
| AA |
0.02% |
0.77% |
| A |
0.10% |
2.04% |
| BBB |
1.09% |
3.61% |
| Below-investment-grade |
7.11% |
29.66% |
Source: Moody’s Investors Service, US Municipal Bond.
Defaults and Recoveries 1970-2020
Chart is for illustrative purposes only.
Annualized total return, %
5 years ended October 31, 2021
Source: Morningstar Direct, October 31, 2012.
Taxable equivalent returns are assuming 37% tax bracket and 3.8% Medicare tax.
Chart is for illustrative purposes only.
What this means for investors
Low municipal default experience continues to demonstrate the inherent credit strength of the asset class. Over the past five years, municipals have outperformed
other fixed income asset classes with lower inherent risk. The below-investment-grade category, or high yield, is the best-performing asset class in fixed income, and has done so with substantially lower risk. We continue to advocate for investors to add to allocations if volatility results as the Federal Reserve ends tapering and raises rates.
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