To find the distress in the municipal-bond market, look to the Southeast and Midwest.
That’s the conclusion from Municipal Market Analytics, a research firm that examined state and local government bond defaults by using Bloomberg data and disclosure filings from issuers.
Such lapses are extremely rare, accounting for a minuscule share of the nearly $4 trillion market. But counties in the Midwest and Southeast are home to about 37 percent and 22 percent, respectively, of outstanding bonds that are in default for failing to make adequate payments or for violating elements of the debt contracts. Excluding bankrupt Puerto Rico, about $19 billion of the $31.8 billion in defaulted and impaired bonds are in those two regions.
That share is notable considering the areas together have issued only about one-third of all outstanding bonds.
Years of economic decline contribute to the distress in the Midwest, said Matt Fabian, a partner at MMA. The Southeast, meanwhile, has been home to speculative projects that have less of a cushion when they go downhill, he said.
Overall, defaults and impairments tend to cluster in metropolitan areas that are smaller and poorer than average, as measured by gross domestic product, housing values and per capita income, he said. Nationwide, entirely rural counties are home to about 5 percent of impaired bonds and account for just 2 percent of all outstanding debt.
Fabian’s analysis is the bond-market version of Hillbilly Elegy, the J.D. Vance memoir about growing up in a region left behind economically as wealthier, urban communities surge. These struggling areas -- and the defaults there -- will only worsen as federal and state governments pass along costs to municipalities and as growth slows or reverses, he said.
"As income inequality grows in America and economic outcomes diverge, this trend of defaults is only going to get stronger," he said.
In Milledgeville, Alabama, last year’s bankruptcy of the Oconee Regional Medical Center helped push Baldwin County’s rate of impaired bonds to almost 16 percent, and in Bay City, Michigan, the issuer of $15.5 million in revenue bonds to finance a DoubleTree Hotel is on the hook for missed payments, according to MMA data.
Complicating the notion that high debt leads to distress, Fabian’s data shows something different: counties with higher impairment rates tend to have less in municipal debt outstanding.