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High yield municipal bond default rate12/26/2023 ![]() ![]() Nonetheless, when there is a noteworthy credit event in municipal bonds, some commentators, as they have in the past, may forecast a worst-case scenario than is warranted. Notably, these are lower rates than what occurs within the global corporate market, where such data figures are 5% and higher.ĭowngrades may become more numerous in recessions, although typically with a lagged effect. In any given year, roughly 1% of AAAs, AAs, and As each are downgraded a full rung according to Moody's data from 1970 to 2021. Let's consider how municipal bonds have historically performed through economic cycles.ĭowngrades occur in municipal bonds as they do in other fixed income credit sectors. And as active managers, we have already positioned our portfolios with our market expectations in view. We would like to proactively reassure you that the municipal bond market is broadly in strong shape, and remind you that there is a huge difference between a downgrade by a credit agency and a default that requires sacrifice by bondholders.Įven if there are pockets of credit stress, the benefits of diversified bond funds can greatly temper portfolio impact. Vanguard currently believes a recession will likely arrive this year, and municipal bond investors should expect that headlines about the potential for downgrades and defaults will soon follow. Portfolios with well diversified holdings provide investors comfort that the occasional default will not materially impact the fund. ![]() Cumulative defaults over the previous 10 years total less than 0.1% of the municipal investment-grade 1 market, according to Moody's data as of December 31, 2021. While waves of downgrades can occur in difficult economic times, defaults are rare, and state and local finances currently are in the best shape they have been in for more than 20 years.We believe 2023 will be no different, which may spark headlines that raise concerns for the tax-exempt market. The economy is expected to enter a recession next year, which typically leads to credit downgrades in municipal bonds. ![]()
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