Aug 15 U.S. municipal bond defaults are more
numerous than the rating agencies report, according to data
released on Wednesday by the Federal Reserve Bank of New York.
Combining data on unrated and rated bonds, researchers at
the bank found that from 1970 to 2011 there were 2,521 defaults
in the $3.7 trillion U.S. municipal bond market, compared to
just 71 listed by Moody's Investors Service.
They also found that from 1986 to 2011 alone there were
2,366 defaults, compared to the 47 defaults Standard & Poor's
reported over the same period.
"Although the low default history of municipal bonds has
played a key role in luring investors to the market, frequently
cited default rates published by the rating agencies do not tell
the whole story about municipal bond defaults," according to the
Usually, bonds sold by smaller municipalities or authorities
and carrying higher risk of default do not have ratings from
Moody's, S&P or Fitch Ratings.
"The unrated portion of the market can be home to municipal
bonds of lower credit quality, exhibiting a higher frequency of
defaults," the study found.
"We believe that rated municipal bonds tend to be
self-selected: issuers are less likely to seek ratings if their
municipal bonds are not likely to achieve investment grade
ratings," it added.
According to the study, revenue bonds, which are issued for
services and backed by pledged revenues, default more than
general obligation bond, especially those where the services are
not essential. Revenues bonds have made up "almost two-thirds of
municipal new issuance since the mid-1990s," it found.
Concerns about defaults are growing after three California
cities filed for bankruptcy in the last two months and the bond
insurance industry, which pays investors in the event of a