Skip directly to Accessibility Notice
  • Municipal Bonds

    High Yield Municipal Bonds Hold Strong Despite Defaults

    Tamara Lowin, Senior Municipal Research Analyst
    August 13, 2021
     

    The high yield municipal market’s resiliency passed its latest test in the COVID-19 pandemic. While default rates were elevated in 2020 and so far in 2021, a closer look offers a more encouraging picture.

    Most municipal borrowers began to feel a financial impact from the Coronavirus by the second and third quarters of 2020. At the time, municipal investors were told to brace themselves for an unprecedented number of defaults across all sectors. Once the dust settled, the municipal bond space in 2020 saw 83 new defaults, quite a bit higher than the five-year average of 58, but not the calamity that was expected. This 43% increase, or 25 more defaults, totaled $3.3 billion1.

    While default rates increased in several sectors, the healthcare sector is responsible for most of the spike, doubling its five-year average. The healthcare sector is known as one of the riskiest sectors historically, mainly due to the senior-living sub-category, which includes nursing homes, assisting living facilities, and continuing care retirement communities. This category was directly impacted by the pandemic and hit harder than any other municipal sector. The nation saw occupancy levels fall, broken supply-chains, and a loss of employees, which devastated them financially.

    Looking at the first seven months of 2021, we see that defaults in every sector, with one exception, have plummeted, and appear primed to settle in at levels similar to pre-pandemic times. However, senior-living facilities continue to struggle. So far in 2021, 25 senior living bonds have defaulted, compared to 30 in all of 2020 and 12 in 2019.

    The concentration of defaults in one sector affirms our belief in the strength of high yield municipal bonds overall. The shock to the system did not result in widespread staggering defaults, but instead targeted borrowers most vulnerable to a sudden health-event shift. It is no surprise that the sector most directly impacted by the Coronavirus continues to struggle through instability. However, the size and brevity of the disruption in the remaining sectors speaks to the continued strength of high yield municipal bonds.

    Healthcare Defaults Are Growing in Number and %

    Healthcare Defaults are Growing in Number and %

    * First seven months of 2021

    Source: All data and information, Municipal Market Analytics, Inc. (MMA). As of 7/31/2021.

    IMPORTANT DISCLOSURES

    Source Municipal Market Analytics, Inc. (MMA). As of 7/31/2021.

    Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this commentary.

    This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

  • Authored by

    Tamara Lowin
    Senior Municipal Research Analyst