Given the parlous condition of state and local finances, you might conclude that muni bonds are a disaster waiting to happen. I disagree. In fact, I feel even more confident about most munis after doing some research into what causes them to blow up.

In April, Moody’s Investors Service issued a summary of every default since 1970 by a municipal issuer with a Moody’s rating (that includes all state and local governments and most revenue-generating public authorities, so this isn’t a case of Moody’s stacking the deck by selecting only the highest-quality issuers). For all that time, Moody’s counted 54, or barely more than one a year. A default is any event that interrupts the timely payment of interest and principal or forces bondholders to take a “haircut” -- for example, having to accept a less valuable new bond in exchange for the original. The average loss of principal one month after these 54 incidents was 40%. Corporate-bond defaults, by comparison, typically cost bondholders 63%.

Source: Kiplinger


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