Municipal bonds default rarely. Investment-grade municipal bonds carry a cumulative ten-year default rate of about 0.10%, compared with 2.24% for investment-grade corporate bonds over the same period, according to Moody’s data covering 1970 through 2024. That makes munis roughly 20 times less likely to default than their corporate counterparts. The number that applies to your holdings, though, depends heavily on the rating, whether the bond is a general obligation or revenue bond, and whether it carries a rating at all.
Default Rates by Credit Rating
Among rated bonds, the credit grade is the single best predictor. Moody’s figures through 2024 show the following cumulative default rates:
- Aaa: 0.00% at both five and ten years. No defaults in the historical record.
- Aa: 0.01% at five years, 0.02% at ten years.
- A: 0.03% at five years, 0.10% at ten years.
- Baa (lowest investment grade): 0.46% at five years, 1.09% at ten years.
- Ba (highest speculative grade): 1.93% at five years, 3.49% at ten years.
- B: 11.90% at five years, 17.07% at ten years.
- Caa-C: 20.62% at five years, 25.59% at ten years.
Two patterns stand out. The cliff between investment grade and speculative grade is steep: a Baa muni’s 1.09% ten-year rate more than triples to 3.49% at Ba. And even at the bottom of the scale, munis default less often than equivalently rated corporates. Moody’s records a 25.59% ten-year default rate for Caa-C munis against 51.44% for Caa-C corporates.
An older Moody’s study covering 1970 through 2000 put the ten-year cumulative default rate across all rated municipal issuers at 0.0420%, versus 9.8363% for all corporate bonds. Aaa munis recorded zero defaults across every horizon measured.1Moody’s. Moody’s US Municipal Bond Rating Scale S&P Global reported a twelve-month trailing municipal default rate of 0.05% as of mid-2019.2S&P Global. Should Municipal Bonds Be Considered Core? Different agencies, different windows, same conclusion: rated munis default at rates most fixed-income categories can’t approach.
The reason traces to structure. Local governments can raise taxes, cut services, defer projects, and tap reserves. They also don’t disappear. A retailer that loses customers goes away; a city that loses a major employer keeps collecting property taxes on every parcel inside its borders.
General Obligation vs. Revenue Bonds
The next big split is what backs the debt. General obligation bonds are secured by the full faith, credit, and taxing power of the issuer, meaning the municipality can raise property or sales taxes to make bond payments.3MSRB. Sources of Repayment FDIC research covering 1998 through 2017 measured a GO default rate of 0.07% by number of issues.4FDIC. Do Municipalities Pay More to Issue Unrated Bonds?
Revenue bonds depend on income from a specific project or enterprise: a toll road, hospital, airport, water system, or industrial development. If the project underperforms, bondholders have no claim on the government’s general tax revenues. The same FDIC study found revenue bonds defaulted at 1.24% by number of issues, roughly 18 times the GO rate. Defaults cluster in healthcare bonds, where hospitals face competition and regulatory risk, and in industrial development bonds, which effectively depend on the finances of a single private-sector user.
Even at 1.24%, revenue bond defaults sit well below typical corporate rates. But treating all munis as interchangeable understates a real gap. A revenue bond tied to a small regional hospital doesn’t carry the same risk profile as a GO bond from a large, economically diverse city.
Rated vs. Unrated
Whether a bond carries any rating at all matters as much as the grade itself. FDIC data show unrated munis defaulted at 1.24% by number of issues against 0.19% for rated bonds, more than six times the rate. By dollar volume the gap widens: 2.97% for unrated versus 0.44% for rated.4FDIC. Do Municipalities Pay More to Issue Unrated Bonds?
Obtaining a rating costs money. Issuers who skip it tend to be smaller entities with less sophisticated finances, or projects that would rate poorly. The absence itself is information. If you’re buying a muni on the secondary market, treat “unrated” as a yellow flag rather than a neutral characteristic.
What Happens When a Muni Actually Defaults
Default doesn’t mean total loss. Moody’s research puts the average municipal bond recovery at 66 cents on the dollar, against 42 cents for corporates.1Moody’s. Moody’s US Municipal Bond Rating Scale Essential-service revenue bonds backed by water or sewer systems tend to recover more, because people keep paying utility bills. Speculative project bonds recover less.
When a municipality can’t pay, Chapter 9 of the federal bankruptcy code provides a framework for restructuring debt.5Office of the Law Revision Counsel. 11 USC Chapter 9 – Adjustment of Debts of a Municipality Filing requires specific authorization under state law, and many states don’t grant it.6Office of the Law Revision Counsel. 11 USC 109 – Who May Be a Debtor Chapter 9 has no liquidation option. The court approves a plan that may extend timelines, cut principal, or lower interest rates, and the municipality keeps operating.
Recovery can still be painful. When Detroit exited bankruptcy after its 2013 Chapter 9 filing, general obligation bondholders received roughly 41 cents on the dollar, a jarring result for anyone who assumed GO backing meant near-immunity. Jefferson County, Alabama, filed in November 2011 carrying $4.3 billion tied largely to a botched sewer expansion; when it exited in 2018 it issued about $1.8 billion in new debt to refinance roughly $3.2 billion in sewer bonds. Puerto Rico’s crisis is the largest in American municipal history: roughly $70 billion in obligations, missed payments starting in August 2015, more than $1.5 billion in defaulted debt, and a restructuring under PROMESA that imposed significant but uneven losses on bondholders.7GAO. Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions
Each of those cases developed over years, not quarters. Persistent budget deficits, a shrinking tax base, and unfunded pension and retiree healthcare obligations were the common ingredients. For revenue bonds the triggers are project-specific: traffic that never materializes, a hospital losing insurance contracts, a housing development that doesn’t fill up.
Bond Insurance
About 7.9% of newly issued munis carry insurance, primarily from Assured Guaranty or Build America Mutual. Insurance guarantees full scheduled principal and interest if the issuer misses a payment, effectively upgrading the bond’s credit to the insurer’s rating. It doesn’t stop the market price from falling if the issuer’s condition deteriorates, and it’s only as strong as the insurer, several of which ran into trouble during the 2008 crisis because of mortgage-backed exposure.
How to Monitor Your Bonds
Federal securities rules require issuers or their agents to report payment delinquencies to the Municipal Securities Rulemaking Board within ten business days.8eCFR. 17 CFR 240.15c2-12 – Municipal Securities Disclosure Those disclosures are free at the MSRB’s Electronic Municipal Market Access platform, emma.msrb.org. Search by issuer name, state, or the nine-digit CUSIP number on your trade confirmation to find event disclosures, financial statements, and official documents.9MSRB. Getting to Know EMMA: A Guide for Senior Investors
Watch for rating changes. A move from investment grade to speculative grade is the clearest signal, but downgrades within investment grade matter when they reflect a trend. Most brokerage platforms alert holders to rating actions. The window for a decision is before a default, not after; every major muni default of the past two decades was preceded by years of warning signs in financial disclosures and credit actions.
For a diversified holder of rated, investment-grade municipal bonds, the historical default record is among the strongest in American fixed income. The risk isn’t zero, and concentrated positions in single issuers or speculative revenue projects can still produce real losses. Rating, bond type, and whether the bond is rated at all are what move the odds.