Last week’s article on municipal bond defaults from Liberty Street Economics, published on the New York Fed’s web site, received a fair amount of media attention. You can check it out here:

Unfortunately, the article’s “findings” should be old news for even the most casual observer of the muni market, namely: (1) unrated bonds have historically defaulted at a much higher rate than rated bonds; (2) there is a “self-selection” phenomenon involved in going through the process of obtaining a rating and (3) “non-essential” service revenue bonds default at a higher rate than essential service bonds.

All these observations have already been well-documented and discussed at length in Chapter 4 of my book, “Investing In The High Yield Municipal Market”. 

To give credit where credit is due, the Liberty Street article did make one interesting point: the default record on municipals seems to be less correlated to the economic cycle than is the case for corporate bonds. It is true that, while overall economic factors do impact State and local governments’ revenue stream, it’s really the “micro” factors that lead to municipal defaults (“willingness to pay” being one, among others). As the authors stated, “municipal bond defaults may be more of a function of idiosyncratic factors associated with individual sectors or issues than the result of broad macroeconomic developments”. 

This is why accurate credit selection is such a challenging task in today’s de-commoditized muni market.


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About Triet M. Nguyen

Triet Nguyen is a veteran of the fixed-income markets and a high yield/distressed municipal bond expert. Over his 32 year career, Triet has designed, marketed and managed every type of buy side investment products, from mutual funds (open and closed-end) to managed accounts and hedge funds. He is currently the managing partner of Axios Advisors LLC, an independent municipal research and investment advisory boutique specializing in high income strategies. Triet is the author of “Investing In The High Yield Municipal Market”, to be published in July 2012 by John Wiley/Bloomberg Press. He also moderates the Municipal Credit Research Forum on LinkedIn. His Twitter handle is @HighYieldPro. Before rejoining Axios (which he founded in 2002), Mr. Nguyen was a Senior Vice President at B.C. Ziegler, where he traded tax-exempt high yield and taxable municipal bonds (including Build America Bonds). From January 2004 to January 2008, he was a Managing Director of Saybrook Capital, LLC, managing one of the first ever municipal hedge funds dedicated to a credit strategy. As Director of Information Services at between 2000 and 2001, Triet contributed to the development of a pioneering online muni bond evaluation system. Prior to 2000, he was a Vice President/Portfolio Manager of the John Hancock Funds and a Senior Portfolio Manager of the Putnam Funds. Triet received a B.A. in Economics and an M.B.A. in Finance and Accounting from the University of Chicago.




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