Doomsayers who depicted an imminent implosion in the municipal bonds market back in 2010 helped drive a mass exodus from munis related exchange traded funds. However, as no real threat manifested, the attractive yields and tax advantages in muni bonds helped bring investors back to the market.
In 2011, the Barclays Capital Municipal Bond Index jumped 10.7%, whereas the S&P 500 only returned 2.1% and the overall bond market gained 7.9%, as measured by the Barclays Capital U.S. Aggregate Float Adjusted Index, according to Vanguard.
“Despite a challenging economy, muni bonds did remarkably well,” Daniel Wallick, a principal in Vanguard Investment Strategy Group, said. “The hysteria around expectations of disruption in the muni market was not justified.”
Analysts previously based their pessimistic outlooks based on default rates in 2010 and 2011 that were higher than the historical average – the defaults came from those of one-time projects funded by special revenue bonds as opposed to the general obligation bonds that fund municipalities.
According to Moody’s Investors Service, only one general obligation default occured in the past three years out of 9,700 issues.