The economic storm clouds are gathering. A decline in job openings and a plunge in manufacturing activity in March are the latest indicators that a recession may be on the horizon. Many investors are seeking shelter from the storm. We suggest they consider the municipal bond market. With many bonds backed by the full faith and credit of the issuing government or revenue sources derived from essential services, municipal bond credit ratings have historically been relatively stable—even during recessions.
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Data collected by ratings agency Moody’s shows that, over a four-decade period, municipal ratings experienced a significantly smaller proportion of negative ratings actions during recessions compared to corporate bonds
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Default rates further substantiate the assertion that the credit quality of muni bonds is superior that of corporate bonds. According to Moody’s, for the 10-year period ended December 31, 2021, cumulative default rates for investment-grade municipal bonds totaled 0.09%, on average. This compares with 2.17% for the global corporate market—well over 20 times that of munis.
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When considering the stability of muni bonds during an economic downturn, tax-exempt status should not be overlooked. Munis are exempt from federal income tax and, in some cases, state and local taxes, providing investors with a predictable income stream and peace of mind.