Looking at the potential risk profile, the average default rate of municipal bonds was 0.10% over 2014. In contrast, investment grade corporate bond default rates were about 0.50% over the past several years. Additionally, speculative-grade or junk bonds have a historical default rate of 4.5%. The credit risk comes as no surprise since assets with greater returns typically come with greater risks.
The munis market has been supported by a growing economy and slower issuance of new debt. As the economy expanded, employment rates are up and tax revenue has been on the rise. Meanwhile, muni bond funds have been steadily gained as high demand outpaced a slower supply of new debt. Although, municipalities have been increasing new issuance this year. [Muni Bond ETFs Look Attractive After Pullback]
For more information on the munis market, visit our municipal bonds category.
Max Chen contributed to this article.