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Uptick in Muni Defaults Could Hurt More Investors in 2017

By Amey Stone

While the uptick in municipal bond defaults isn't that high, it could be more painful for municipal bond investors in the coming year, writes Matt Fabian of Municipal Market Analytics in his latest report on default trends Friday.

That's because bond insurance isn't nearly as common now as it used to be. "Credit trauma is likely to harm bondholders more directly this year and in the future," he writes.

Last year saw 65 first-time payment defaults, up from 60 in 2016. Eight of 2016 defaulters were Puerto Rico issues. However, the number of "impaired" credits declined in 2016.

He sums up the outlook:

The drop in impairments bolsters the alternative scenario outlined in the last issue of DEFAULT TRENDS: that municipal defaults are not necessarily beginning to leg higher but are instead experiencing modest volatility around a relatively low baseline. Nonetheless, MMA is comfortable advising subscribers to approach the new year expecting an uptick in default activity as emergent state budget gaps belie tax and fee revenue weakness across the government spectrum and, because of more aggressive high yield underwriting in 2016 (see OUTLOOK 1/3/17) a large universe of unseasoned project financings is poorly prepared for economic setbacks.

The iShares National Muni Bond ETF (MUB) climbed to $108.35 by Friday afternoon, a 27 cent gain so far in 2017.

Tim HollerDefaults