We’ve heard it countless times, and you probably have, too: When commentators discuss the merits of municipal bonds, they unfailingly – and solemnly – mention potential pitfalls.
Throughout our decades in the municipal market, educating our clients so they make informed decisions is key to our success. We present opportunities and identify possible risks so their investments align with their goals, and we applaud others who endeavor to do the same.
However, as in all things, perspective is necessary.
Record run
We were reminded of this recently after reading a headline from Bloomberg: “Record Hiatus of Muni Bankruptcies Cheers Market – for Now.”
What caught our eye was, naturally, the fact that there hasn’t been a municipal bankruptcy in 449 days, a record.
State coffers, aided by federal pandemic assistance, are generally healthy. Inflation, which increased the cost of goods and wages, has also padded municipal revenues and tax collections.
“We’re in a very strong credit cycle right now,” said Arlene Bohner, of Fitch Ratings, according to Bloomberg. “Not every local government is in a stronger position today than they were before the stimulus, but on the whole most governments are.”
The obligatory caveat
The story goes on to note potential future hazards, and adds an ominous quote from a market professional.
“Now what’s going to be important to watch is what happens over the next three to four years,” Bloomberg quotes a fixed-income researcher.
This made us pause.
Should investors watch the market for the next few years? If so, what should they be looking for? Does waiting help them achieve their goals?
Risk of doing nothing
We can understand how the good news/potential bad news scenario outlined in the article might be disorienting to some.
It can distract from the bigger picture, in which the municipal bond market has successfully served generations of investors.
In addition to the 449-day feat (and counting), another eye-popping number investors should keep in mind is 0.09%. That’s the miniscule, 10-year cumulative default rate for investment-grade municipal bonds from 1970 to 2022, according to Moody’s.
For perspective, the default rate for corporate securities is 2.23%.
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As we’ve said, healthy issuers are critical for a thriving municipal bond market, and generally, reports have been positive (“State of Issuers Aids Robust Muni Market”). Issuers have a range of options to cover debt and deploy them when necessary.
We believe investors can – without reservations – cheer the new record.
All investing involves risk. The finances of states and other issuers may indeed change and other unforeseen circumstances could arise. Investors should always understand the bonds they’re buying.
But it’s also important to focus on the role of municipal bonds and understand how they’ve performed for decades.
It’s also worth knowing that good news is sometimes just that: Good news.
