September 15, 2011

Municipal Fallout

U.S. state bond markets are not insulated from each other but are from the federal bond market

THE market for municipal bonds has often been viewed as a safe haven by individual investors (see box). The 45,000 U.S. bond issuers include state and local governments, school districts, and water authorities that sell their debt securities in the so-called muni market. They are all reliable payers. Only 54 of them defaulted during 1970–2009 (Moody’s, 2010). The most recent U.S. state to default was Arkansas in 1933, during the Great Depression. Throughout history there have been but a handful of state defaults—10 in the aftermath of the U.S. Civil War and eight plus the then-territory of Florida during the 1830s and 1840s (Ang and Longstaff, 2011).

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