Nonetheless, when there is a noteworthy credit event in municipal bonds, some commentators, as they have in the past, may forecast a worse scenario than is warranted.
Whether it was financial analyst Meredith Whitney’s 2010 warning about a state pension crisis or the apprehension that followed the bankruptcies in Detroit and Puerto Rico, the municipal market has periodically been roiled by predictions of doom that never came to pass.
Currently, however, we see that states’ rainy-day reserves are flush, pension contributions are broadly increasing, and state and local tax collections have been very strong for two years in the aftermath of the pandemic.
The main takeaway: Municipal bond downgrades are a common occurrence during recessionary times. Defaults attract a lot of attention, but they tend to be more the result of idiosyncratic circumstances.