We've read a lot about the dire state of local finances, and Meredith Whitney's prediction of doom-and-gloom in the muni bond market generated lots of media around December.

But can it be that the market is actually on the mend?

Whitney's controversial research predicted a wave of defaults, but Bloomberg notes that defaults so far this year are about a quarter of the $4.3 billion of defaults in 2010. Debt-service payment defaults this year amounted to 0.64 percent of municipal-bond sales, compared with 0.99 percent for 2010. Municipal debt has returned 9.1 percent this year, beating Treasuries' 8.2 percent, with tax-exempt yields close to the lowest in more than two years. In addition, "from California to Massachusetts, states, cities and other local borrowers are set to sell about $67 billion of long-term debt this quarter. It's the first time since at least 2003 that third-quarter offerings will rise from the prior three months."

This owes to the fact that municipalities will do just about anything to avoid a default, which would be an unqualified local disaster, the financial equivalent of a twister touching down. Most local politicians and managers have judged that it's better to swallow some bitter medicine now, in the form of job cuts, cutbacks in services, reduced health care contributions and the like. You have to applaud this shock treatment, though the pain at the employee level is real. Contrast this effort with the federal government effort, which cannot move nearly as fast.

For more:
- here's the article

Related articles:
Jefferson County muni default could be largest in history   
Muni bonds avoid mass defaults   
Meredith Whitney sticks to bearish muni prediction