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U.S. Municipal Bond Defaults Rose in Past Two Years, Moody’s Report Says

The rate of U.S. municipal bond defaults doubled in the past two years relative to the average from 1970 to 2009 amid the lingering effects of the recession, Moody’s Investors Service said.

Defaults rose to 5.5 per year in 2010 and 2011, from 2.7 in the previous 39 years, the company said in a study of bonds it rates. While the majority of defaults were in health care and multifamily housing, more failures the past two years came from smaller cities struggling to sustain services and obligations including pensions and salaries, Moody’s said in a report released today.

“While we expect the vast majority of municipal issuers to continue to pay their debts, we also expect a very small but growing number of general government issuers to default on their bonded debts,” Anne Van Praagh, Moody’s chief credit officer for public finance, said in a statement.

Seventy-three percent of defaults in the 41-year period were in health care and housing, while five general-obligation issuers defaulted, Moody’s said. Harrisburg, Pennsylvania, was the only general-obligation issuer out of 9,700 rated by the company at the end of 2011 to default in the past three years. The capital city defaulted in June 2009, the report said.

The $3.7 trillion muni market returned 11.2 percent last year, its best performance since 2009, according to Bank of America Merrill Lynch index data. State revenue has risen seven straight quarters and now exceeds levels from before the 18- month recession that ended in June 2009, the Nelson A. Rockefeller Institute of Government said in January.

Municipal defaults in 2010 and 2011 included infrastructure bonds issued by the Las Vegas Monorail and Santa Rosa Bay Bridge Authority, according to Moody’s. Housing debt accounted for six of the 11 failures in the two-year period, the report said.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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