Municipal Bond Forum
Default rate for non-rated munis
Q
What was is the default rate in the last year for non-rated munis? There are many bonds that are not rated by Moody’s, and I’m asking about those issues.
A
James A. Klotz responds:
Unfortunately, there is no central repository for all municipal bonds, including non-rated bonds, as far as I know. Municipal bonds are not traded centrally on an exchange and there are thousands of small, locally issued and held bonds that are hard to track, so any estimate would be hard to make. We do know that unrated bonds, by their nature, have a higher risk profile or they would have sought ratings in the first place. Many are small industrial revenue bonds for corporate projects, startup non-profit facilities, etc.
The benefit of buying rated bonds is that they have been reviewed by analysts trained in credit analysis and are subject to standardized review. As you point out, a comprehensive study of the type required to determine actual default rates for non-rated bonds would be of great interest to bond purchasers. However, the nature of the municipal market makes that very difficult.
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