Municipal bond yields and default rates

Sources: Top chart: Bloomberg and Wells Fargo Investment Institute. Yield to worst: monthly data from March 1, 2017 to September 30, 2021. Bottom table: Moody’s Investor Service, “U.S. municipal bond defaults and recoveries, 1970-2020”. Municipal and corporate bond default rates: 10-year average cumulative default rates, yearly data from 1970 to 2020. Investment grade represented by Bloomberg U.S. Aggregate Bond Index. Municipal represented by Bloomberg Municipal Bond Index. For illustrative purposes only. Bloomberg U.S. Aggregate Bond Index is a broad-based measure of the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Bloomberg Municipal Bond Index is an index of a broad range of investment-grade municipal bonds that measures the performance of the general municipal bond market. Index returns do not represent investment performance or the results of actual trading. Index returns represent general market results, assume the reinvestment of dividends and other distributions, and do not reflect deduction for fees, expenses or taxes applicable to an actual investment. Yields represent past performance and fluctuate with market conditions. An index is unmanaged and not available for direct investment. Current yields may be higher or lower than those quoted above. Past performance is no guarantee of future results.

Tax equivalent yield assumes a 20% effective tax rate. Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. The tax equivalent yield is the yield a taxable bond would have to earn to match the yield available on a tax-exempt municipal bond excluding AMT. Yield to Worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes and may be subject to the alternative minimum tax, and legislative and regulatory risk.

Key Takeaways

  • We expect municipal demand to remain strong in high-tax states given the potential for higher tax rates.
  • The pace of municipal defaults has accelerated over the last decade, especially for lower rating sectors. Still, default rates between municipals and corporates remain divergent in the speculative-grade (high-yield) space.