Some investors remain wary about municipal bond exchange traded funds after the Detroit bankruptcy fiasco and weakness in Puerto Rico’s finances. While defaults rates have picked up, they remain extremely infrequent, according to Moody’s Investors Service.
“Municipal bond defaults have increased in number since the financial crisis, but remain extremely infrequent,” Moody’s Investors Service said in the report, US Municipal Bond Defaults and Recoveries, 1970 — 2013.
Specifically, there were seven Moody’s rated defaults in 2013, following five defaults in 2012, with an average of 5 defaults per year over the 2008 to 2013 period.
“We expect municipal defaults will remain few in number,” Moody’s said in the report. “Even recently increased default activity remains well within that predicted by our present municipal rating distribution. We believe that risks are stabilizing as public finance issuers adjust to new realities.”
Last year, five of the seven munis were general government defaults, or in general obligation bonds, including the first-ever school district default and Detroit, now the largest U.S. munis bankruptcy on filing. [Detroit Bankruptcy Casts Shadow Over Muni Bond ETFs]
“More recently, general government defaults and bankruptcies have been on the rise, although these still remain few in number,” Moody’s said in the report.
Many of the largest muni bond ETFs, such as the iShares S&P National AMT-Free Muni Bond ETF (NYSEArca: MUB) and the SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI), are heavily allocated to general obligation (GO) bonds, or bonds that are backed by the credit and taxing ability of a city or state.