The Muni Bond Armageddon that Didn't Happen

Hey do you remember how all the municipal bonds were supposed to start defaulting in mass?    It was around 11 months ago that Meredith Whitney made a prediction that we'd see massive defaults on municipal bonds because governments simply couldn't afford their debt levels.   She was on the show 60 Minutes and declared that

"There's not a doubt in my mind that you will see a spate of municipal bond defaults,"  ... "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults." and later "' It'll be something to worry about within the next 12 months,"


The prediction seemed to make sense to many people at the time given how our economy and state of municipal finances have been.   But its been nearly a year and we've seen nowhere near the amounts of defaults she predicted.  

In fact in the first half of 2011 the amount of defaults dropped significantly from what was seen in 2010.   see : Meredith Whitney Loses Credibility as Muni Defaults Fall 60% from Bloomberg.

They say : "Standard & Poor’s counted 28 municipal-market defaults totaling $511 million in the first six months of 2011, compared with 53 totaling about $1.55 billion in the first half of last year, according to a report from the New York-based credit- rating company."  

The Bloomberg article also pointed out that the record for municipal bond defaults was $8.15 billion in 2008.  Note that Mrs Whitney was talking about sizable defaults in the order of 100's of billions of dollars.    

Not only did muni's not fail in mass in some sort of Armageddon, the article Time’s Up Meredith Whitney, Muni Prediction Was Wrong points out that muni. bonds performed well as an investment.   They say : "the ML Muni Master Index is up 9.5 percent this year"    You can verify that muni's are up yourself by seeing the performance of the ETF iShares S&P National Municipal (MUB).

Default rates on municipal bonds have been historically very low.    So far this year the default rate is only 0.03%.    Thats not much at all and its actually lower than the historical rates.

When you hear these kinds of dooms day predictions you need to be critical of them.   There are a lot of financial pundits and alleged gurus out there who make drastic predictions.   These predictions don't often pan out.  Next time you hear such a prediction from Meredith Whitney you should know better.


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