• Muni Nation

    The Dreaded “D” Word

    Jim Colby, Portfolio Manager
    March 14, 2012
    • Default has different meaning for municipals
    • Who is the authority on muni defaults?
    • Perception of rising muni defaults is not the reality

    We have seen and heard the term default brought into play for the municipal bond market in a significant way over the past 18 months, but never more so than in the six months subsequent to Meredith Whitney's pronouncements from her December 19, 2011 appearance on 60 Minutes. Sparing the details, her suggestions sent the municipal market into a tailspin during the first half of 2011. What she did not make clear was the all-important distinction between the terms "default" and "bankruptcy" as they apply to municipal bonds. In the muni universe, these terms have significantly different meanings than in the corporate world. While corporate defaults conjure images of layoffs and restructuring, municipal defaults can — and often do — mean a failure of an issuer or obligor to meet certain terms of the controlling operating documents. Most often, it requires and spells out a remedy. But it doesn't necessarily mean non-payment.

    What, then, is the average investor to believe when reading headlines speaking of defaults and bankruptcies in the muni space? The ratings agencies (Moody's Investors Service and Standard & Poor's) have each periodically produced studies of these events, but they generally limit their activities to issues they have rated. Other analyses come from advisors and market professionals who glean details from many sources to produce broader studies. There is, however, no single "go to" authority for a universally accepted evaluation. To generalize from all information available, we can conclude that the combination of default and bankruptcies in the municipal market has been exceeded in the corporate market by a factor of approximately three to one. (Based on historical data from 1980 through the present.)

    The perception that there is danger in the municipal market because of a rising number of defaults often ignores the reality that bondholders are still being paid their coupons and that remedies often set the course for a cure. Still, non-payments may occur — and they demonstrate that certain risks inhabit the world of municipals, but, we would argue, usually at a far lower rate and severity than in the taxable universe.


    This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed in this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

    VanEck does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.

    Please note that MUNI NATION® represents the opinions of the author and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck. MUNI NATION is a trademark of Van Eck Associates Corporation.

    All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.

    Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.

    The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.

    Diversification does not assure a profit or protect against loss.

    Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus and summary prospectus which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

    Van Eck Securities Corporation, Distributor
    666 Third Avenue
    New York, NY 10017