High-Yield Municipal Bonds
According to Moody’s, the cumulative default rate for high-yield municipal bonds from 1970 through 2011 was 7.94%; this translates into an average annual default rate of 0.19% (7.94/42 years). Over the same period, investment-grade municipal bonds had a cumulative default rate of 0.08% (or 0.002 per year).
Total return figures for high-yield municipal bonds have been mixed: -24% (2008), 31% (2009), 4% (2010), and 11% (2011). During these same four years, long-term municipal bonds had the following returns: -10% (2008), 18% (2009), 1% (2010), and 11% (2011). High-yield muni bonds may be subject to event risk, for example, fees from activities from an airport terminal or special revenue bonds issued by American Airlines (which filed for bankruptcy in late 2011).
The high-yield muni bond marketplace is estimated to be $65 billion, a small slice of the $3 trillion municipal bond market. Roughly 75% of the Barclays Municipal Bond High Yield Index is below-investment grade; the balance is in low-investment grade bonds.
The biggest municipal bankruptcy in U.S. history took place in November 2011, when Jefferson County, Alabama, filed for bankruptcy with $4 billion in debt.