Municipal Bond Stress Is Isolated — Here’s Why It Matters
December 09, 2025
Read Time 4 MIN
Key Takeaways:
- “Risky” muni sectors show rising defaults while “safe” sectors defaults remain near zero.
- Senior living, charter schools, and Industrial Development Bonds drive most default activity.
- Diversification and focus on essential-service credits remain crucial in the muni sector.
Municipal Defaults Are Still Low, But the Risk Gap Is Widening
If you follow the municipal bond market, you know “defaults” tend to get more attention than they deserve. They’re rare, especially among initially rated issuers, but they still provide useful information.
Recent data from the Municipal Market Analytics (MMA) Default Study shows a clear trend. Overall credit quality is still strong. However, the gap between the safest and riskiest parts of the market is growing.
Historical Municipal Bond Default Rates
Over the past decade, annual municipal default rates have sat between 0.03% and 0.15% of par outstanding1, levels that are extremely low compared to corporate debt. The more interesting development isn’t the level of defaults, but the dispersion between sectors. MMA divides the municipal borrowers into 32 sectors and categorizes each sector as a “safe” or “risky” sector.
Since 2015, 94% of the 682 borrowers that defaulted were in risky sectors. As a percent of outstanding debt, annual defaults remain steady.
However, risky sector bonds are seeing more defaults. The widening spread shows a growing gap. This gap is between strong, essential-service issuers and riskier, project-based borrowers. It reminds us that the muni market is not one thing. It is a mix of credits that act differently based on their purpose and structure.
First Time Payment Defaults
Source: Municipal Market Analytics (MMA) Research. FY2025 through October 31.
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The Weak Spots of the Municipal Market
Since 2015, certain sectors stand out for their higher or more volatile defaults. Retirement and senior living facilities are the most prolific defaulters, seeing 2-4% outstanding debt default annually. These projects are sensitive to broader economic and demographic trends including declines in the residential real estate market, growing health care workers outpacing supply, and weakening coverage of governmental health insurance.
Charter schools have shown wide swings as well, with annual default rates often surpassing 1% of its sectors’ debt outstanding. Success in this sector depends upon strengthening enrollment trends, sophisticated oversight, and quality school management, as well as favorable local demographics and state policies.
Industrial Development Bonds (IDBs) also exhibit elevated default activity, particularly in recent years, due to their project-specific nature and closer resemblance to corporate-style risk. Many of these projects use new technology which often results in expensive challenges; other issues these face are, lower demand for end product than forecast, lower plant productivity, and elevated construction costs.
The Safe Havens of the Municipal Market
By contrast, traditional public-purpose sectors continue to show remarkable stability. State and local government debt, as well as utilities, public higher education, local housing authorities, and transportation credits all post near-zero default rates year after year. These sectors benefit from essential-service demand, broad, reliable revenue streams, and, in many cases, explicit or implicit government support.
Their consistency underscores why they form the foundation of most high-quality municipal portfolios. As safe sectors currently represent about 70% of municipal debt outstanding, the risk of borrower default remains very low for most of the issuance.
What the Muni Market Means for Investors
For investors, the key takeaway is that municipal bonds remain a fundamentally resilient asset class. Defaults are still extremely low, but the growing dispersion underscores the value of credit research and thoughtful sector allocation. Diversification across issuers and sectors remains crucial, and investors should favor essential-service credits with stable revenues over niche or highly leveraged projects. In an ETF context, broad market exposure continues to provide natural insulation against the idiosyncratic risks that show up in smaller, less diversified portfolios.
The muni market’s recent credit trends don’t signal systemic weakness, they signal selectivity. We’re in an environment where strong issuers are staying strong, but weaker ones are starting to show stress. For long-term investors, that means the opportunity isn’t in chasing yield, but in owning quality credits that will keep paying reliably through whatever cycle comes next. Municipal defaults may still be rare, but understanding where they’re concentrated is key to preserving the stability the asset class is known for.
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Important Disclosures
1 All figures exclude Puerto Rico defaults.
Please note that VanEck may offer investment products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Associates Corporation.
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Important Disclosures
1 All figures exclude Puerto Rico defaults.
Please note that VanEck may offer investment products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Associates Corporation.