#Municipal bond defaults full#

Top 3 are Detroit, Jefferson County AL, and Puerto Rico. Note: Includes Technical, Pre-monetary, and Monetary defaults. Source for both charts: Yang and Abbas 2019, Table 3. They do not find an increasing number of defaults indeed, excluding the three big municipal bankruptcies, they find a decline in defaults since 2012.

Most of these defaults that Yang and Abbas track are among bonds that haven’t been rated by a credit rating agency, uninsured bonds, or bonds that are not GO bonds. Some revenue bonds are issued by a municipality on behalf of a private entity. Revenue bonds, in contrast, have a claim on a specified stream of revenues – tolls on a highway or ticket revenues at a stadium, for instance.

#Municipal bond defaults full#

General Obligation (GO) bonds, the most common type of municipal bonds, are backed by the full faith and credit of the issuing municipality, and issuing governments can tap into all available revenue sources to meet their obligations to bondholders. Excluding the highly publicized bankruptcies of Detroit, Jefferson County, and Puerto Rico, they count 2,049 defaults with par value of $7.2 billion – still a very small slice of all municipal bonds outstanding.

Using data on defaults reported by local governments from 2009 to 2015, including bonds that were not rated, the authors identify 2,563 defaults of all kinds – including technical defaults (for example, failure to file an audited financial report) and pre-monetary defaults (for example, unexpectedly drawing on reserve funds to maintain debt-service-ratios required for a loan) as well as failure to make interest payments. But because these defaults usually occur on bonds issued to fund specific projects, as opposed to general obligation bonds, the defaults do not tend to raise the borrowing costs of the defaulting local governments. Results show that the generalized model with liquidity risk explains the behavior of Treasury and municipal yield curves very well.Defaults on local government bonds have been more frequent than credit rating agencies have reported, according to a paper by Lang (Kate) Yang of The George Washington University and Yulianti Abbas of the University of Indonesia prepared for the 2019 Municipal Finance Conference at Brookings. Furthermore, these implicit income tax rates are remarkably stable over maturities. Controlling for the effects of default and liquidity risk, we obtain implicit tax rates very close to the statutory tax rates of high-income individuals and corporations. Ignoring the liquidity risk effect thus results in an underestimation of municipal bond yields. A substantial portion of the maturity spread between long- and short-maturity municipal bonds is attributed to the liquidity premium.

Liquidity premium explains about 7 to 13 percent of municipal yields for AAA bonds, 7 to 16 percent for AA/A bonds and 8 to 20 percent for BBB bonds. The effects of default and liquidity risk on municipal yields increase with maturity and credit risk. Empirical evidence indicates that municipal bond yields are strongly affected by liquidity risk, default and taxes.

Using a unique transaction dataset, we are able to estimate the liquidity risk of municipals and its effect on bond yields. The municipal yield model includes liquidity as a state factor. We examine the effects of liquidity, default and personal taxes on the relative yields of Treasuries and municipals using a generalized model with liquidity risk.