![]() Only California and Delaware did not post year-over-year revenue gains. The income received by the states in the second quarter was up 3% from the first quarter of the year. As of the end of the second quarter of 2012, states posted their tenth consecutive quarter of rising revenues. ![]() Looking forward, there are several reasons to like municipal bonds. Vanguard diversifies their fund to avoid the risk of a default in any one bond having an adverse impact on the entire fund. Less than one half of one percent of the bonds are unrated. Over 95% of the bonds in the Vanguard Fund are rated AAA, AA, or A. This fund has close to $40 billion of municipal bonds spread over 3,700 issues. The Vanguard Intermediate Term Municipal Bond Fund is one of the largest and most popular municipal bond mutual funds in the market. While municipal bond managers typically have the latitude to buy unrated bonds, they will typically do so only when they have performed their own due diligence and have a high degree of conviction that the revenue streams supporting the repayment of the bonds are stable. However, even the Federal Reserve’s annual default rate for municipal bonds is far lower than the default rate for corporate bonds suggesting that municipal bonds are among the safest bonds available. The Federal Reserve released a study this summer that found a much higher municipal bond default rate than Moody’s because the Federal Reserve analysis included all bonds regardless of whether their issuers paid to have their bonds rated. To be fair, the Moody’s analysis of the municipal bond market only included bonds for which a rating was issued. Their statistics indicate that about one-tenth of one percent of municipal bonds typically goes into default on an annual basis. Moody’s, which is one of the largest bond ratings agencies, has published the default rates of the municipal bond market going back to 1970. Here are some other facts related to municipal bond investing. The bondholder repayment in Central Falls is not typical, but in many municipal bankruptcies, the bondholders are not entirely wiped out. Government workers were laid off, wages were frozen, and property taxes were raised. Surprisingly, Central Falls is emerging from their 2011 bankruptcy filing this year, and the bondholders are being made whole! The bond holders are being repaid while other city stakeholders are hurting. The bond issue was a general obligation of the city, meaning that it is essentially an IOU without a specific revenue stream to fund it. Approximately 25% of its population lives below the poverty level. Central Falls is the smallest city in the smallest state and it has a terrible economic environment. It is not as if this bankruptcy came as a huge surprise. In 20, more hype ensued as news outlets trumpeted the municipal defaults of Birmingham, Alabama’s Jefferson County, Stockton, California, and Rhode Island’s Central Falls.Ĭonsider the details of the Central Falls bankruptcy case. To put the three billion dollars of defaults in perspective, the entire market for municipal bonds is valued at over three trillion dollars. Whitney’s forecast and is roughly the same amount that defaulted in the prior year. Now for the facts: In 2011, approximately three billion dollars of defaults occurred. Following her statements on the popular prime-time news show, a wave of municipal bond selling ensued. First the hype: In December of 2010, in an interview on 60 Minutes, financial analyst Meredith Whitney stated that there would be “hundreds of billions of dollars” of municipal defaults in 2011. That viewpoint has been challenged this year due to a few well-publicized defaults and a recent Federal Reserve report that the default rate may be higher than previously reported. Municipal bonds are generally considered among the safest investments. Most investors have some municipal bonds in their portfolios, either through individual holdings, mutual funds, or exchange traded funds.
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