“Likewise when compared to the five-year CDR of 6.89% for global corporates over the same time period. “The five-year all-rated cumulative default rate ( CDR) of municipal bonds throughout the study period (1970-2020) was unchanged at 0.08% and still remains very low,” adds Cohick. On that note, a recent study by Moody’s Investors Service notes the long-term default for munis is rather low. Municpal bonds, high-yield and otherwise, are seen as long-term investments, ideal for conservative investors and retirees. While there were municipal ratings downgrades during the year, global corporates’ ratings’ downgrades were more frequent.” “(Indeed, during the period of significant market stress during 2020 resulting from Covid, there were only two municipal defaults and neither were virus related.) Second, muni bonds continue to be highly rated compared to corporates. “While they may have become more common over the last 10 years, municipal defaults and bankruptcies still remain rare overall,” says Michael Cohick, VanEck senior ETF product manager. Fortunately, muni defaults remain rare and that’s a plus for investors considering HYD. Of course, the trade-off for more yield on any bond usually is elevated default risk, among other concerns. That’s a lot better than the 0.75% on the widely followed S&P National AMT-Free Municipal Bond Index. After all, the $4 billion HYD sports a 30-day SEC yield of 2.20%. Although inflation ate up your gains in the 1970s and early 1980s, inflation subsided and municipal bonds were a profitable investment and more so because of the tax break.That may sound like an invitation to embrace high-yield municipal bonds and exchange traded funds like the VanEck Vectors High Yield Muni ETF ( HYD A-). When you could get 12% for a CD and pay taxes it made sense to take 7% for a municipal bond on which you did not pay taxes. Those of old enough to remember the 1970s interest rates in adult life may also have invested in municipal bonds at the time. Why Tie Up Your Money for Ten Years with Negative Real Interest Rates? Because inflation has been creeping up, even the best tax-free rate of return on a municipal bond is giving you a negative real interest rate. CDs have the benefit of being insured by the FDIC but municipal bonds rated be Moody’s have a 0.08% default rate. This beats current CD yields for comparable maturities by anywhere from 0.1% to 0.3%. ![]() If you qualify for all possible tax breaks your current municipal bond return on investment will be 1.16% per year. While this is higher than what was reported at the beginning of the century for Moody’s-rated municipal bonds, it compares favorably to the global corporate default rate over the last five years which was 6.89%! The report noted that there was one Moody-rated US municipal bond default in 2020 which was the archdiocese of New Orleans which was characterized as a preemptive and defensive measure.Īs October, 2021, the rate of interest on a 10 year municipal bond averages1.16% which had edged up for the 0.89% average for the previous twelve months. ![]() Municipal bond defaults recorded by Moody’s are listed as the 5-year cumulative default rate from 1970 to 2020 and remained at 0.08% at the end of the decade. Current Default Rate of Municipal BondsĪ Moody’s report from July, 2021 states that through the end of 2020 municipal bond defaults remained relatively low despite a small increase over the previous decade. Unfortunately, folks subject to the alternative minimum tax may not be able to take advantage of all of the potential tax advantages of municipal bonds. And, many municipal bonds are not taxed at the state or local level although this may require that you are a resident of the city or state that issues the bond. Very often, bonds issued by local and state governments are not subject to federal taxes. Investors in the highest tax brackets have historically looked at municipal bonds as a way to avoid taxes on interest income. Forbes published a useful article about municipal bonds.
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