2011 Municipal Bond Defaults
In a September 30, 2011 piece on “60 Minutes,” Meredith Whitney, a well-respected banking analyst, forecasted “hundreds of billions of dollars’ worth of municipal bond defaults would occur within the next 12 months." In the months that followed, investors pulled out money from municipal bond funds for 29 consecutive weeks (note: municipal bonds returned > 10% for 2011). For 2012, the typical long-term municipal bond fund (with a 1.1% expense ratio) had a total net return of 8.9%.
For the 2011 calendar year, ~ $6 billion of municipal bonds defaulted; almost half of this amount was from bonds related to American Airlines (what are called “corporate-backed municipal bonds” or “private placement”). These types of private placement bonds make up a small portion of the $3.9 trillion municipal bond market. Only 1% of the $6 billion in municipal bond defaults came from what are considered the safest portion of such debt: GO and essential service bonds (e.g., water, sewer and utilities). According to Merrill Lynch, there were 10 muni bankruptcies in 2011 (vs. six in 2010). To put things in perspective, the $6 billion of defaults for 2011 represented 0.0016 of the municipal bond marketplace (or < 2/1,1000s of 1%); defaults represented an even smaller percentage and dollar amount in 2012.