Municipal bond defaults occur with a frequency at least 36-fold greater than reported by credit raters, Federal Reserve Bank of New York researchers say.

When including unrated debt not covered by the firms, 2,521 issuers in the $3.7 trillion market for state and local bonds defaulted from 1970 to 2011, authors Jason Appleson, Eric Parsons and Andrew Haughwout wrote today in a blog posting. That compares with 71 reported by Moody's Investors Service for issues it rated over the period.

"Although the low default history of municipal bonds has played a key role in luring investors to the market, frequently cited default rates published by the rating agencies do not tell the whole story," the researchers wrote.

The New York Fed posting, "The Untold Story of Municipal Bond Defaults," analyzes data on rated bonds from Standard & Poor's, Moody's Investors Service and Fitch Ratings, along with unrated debt tracked by Mergent Inc. and S&P Capital IQ.

Moody's collects data only on the issuers it grades, and presents its default statistics in that context, said Robert Kurtter, a managing director at the New York-based company.

"We're not really in the business of trying to evaluate the unrated marketplace," Kurtter said by telephone. The New York Fed's report "isn't inconsistent with our view or what we've been communicating to the marketplace."

Defaults on general-obligation debt backed by the taxing power of a state or city, such as that by bankrupt Jefferson County, Alabama, remain rare, according to the report. The default rate on state and local general-obligation bonds is 0.01 percent, according to Matt Fabian, managing director at Concord, Massachusetts-based Municipal Market Advisors.

Missing Payments

Industrial-development bonds represented 26 percent of failures to pay, the most of any single type of issue, the New York Fed researchers wrote. Housing securities composed 17 percent of the defaults tracked since 1958 and nursing homes made up 12 percent. The study included monetary defaults, in which issuers missed cash payments to bondholders.

Summing up all non-rated muni debt "is like adding the performance of penny stocks sold by boiler rooms to the S&P 500 and saying that stock returns had a lesser experience," John Donaldson, director of fixed income at Haverford Trust Co., said in a statement.

Standard & Poor's calculated 47 municipal defaults among its rated bonds from 1986 to 2011, according to the report. That number increases 50-fold to 2,366 when including ungraded debt.

Banking analyst Meredith Whitney's prediction in December 2010 that "hundreds of billions of dollars" of defaults would occur in the next year sparked the biggest outflow from muni funds since at least 1992. The forecast failed to halt a municipal-bond rally that pushed tax-exempt interest rates near the lowest in 45 years.

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