Insured municipal bonds

[summer2007]

I have been looking at municipal bonds and I noticed that a lot of them are insured but with many different insurers.

Then there is a rating of the municipal bond itself.

On some of the longer maturities municipal bonds would come out ahead in the long run because of the tax exemption.

What I want to know is how safe it actually is to buy a municipal bond that is insured?

Jim

[FIREdreamer]

Actually, Vanguard has stopped proposing a fund dedicated to insured municipal bonds because they have found out that they offer very little advantage over high quality uninsured municipal bonds. Plus many of the muni bond insurers are themselves in trouble and it is unsure whether they could survive a major wave of defaults. So the best thing to do is choose carefully a muni bond based on its own credit rating. Top-rated muni bonds are usually considered very safe and really don't necessitate insurance.

https://personal.vanguard.com/us/Van...042008_ALL.jsp

[saluki9]

Just go for a natural AAA

The cat is out of the bag, the insurance is pretty much worthless.

[harley]

Quote:

Originally Posted by summer2007 On some of the longer maturities municipal bonds would come out ahead in the long run because of the tax exemption.

Isn't this dependent on what inflation does in the future? I've been considering VA state and local munis at 5-6%. But I'm worried about going with long maturities because if inflation goes to 10% or more like in the 80s I'd be underwater on them.

[Dreamweaver]

As of last week, there were only 2 municipal insurance companies still rated AAA: Assured Guaranty and FSA. Assured Guaranty just announced they will buy FSA and so there will only be 1 left. I've heard of a number of new entrants on the horizon, including a insurance company by Warren Buffett. Obviously, the benefit of insurance may have diminished as many of the firms have been downgraded, although my understanding is that even the downgraded firms who have stopped insuring new municipal bonds are still meeting their obligations for existing outstanding bonds.

Clearly, the underlying natural rating of the municipality has become more important than the insurance rating. Also, some types of bonds are less likely to default than others. For example, general obligation bonds are backed by taxing power (the ability to raise taxes as necessary to pay the bonds). Other types of bonds, such as mello-roos bonds, are only revenue backed (whatever revenue comes in is all that is available to pay the bonds). So be sure to research the various types of municipal bonds to see which are less likely to default.

The last thing I want to recommend is look at default rates. The numbers I've seen show that municipalities default far less than corporate bonds. We've heard of so many corporations go bankrupt year after year, but it's quite rare that a city or school district goes bankrupt. Even the devastation to the taxing base after Hurricane Katrina did not result in any defaults. So municipal bonds still seem to be a safe move.

Of course, they are financially very attractive right now. Historically, it's very rarely been the case that municipal bonds have offered higher interest rates than US Treasuries due to the tax exemption, but in the current environment that's exactly what's happening.

[Dreamweaver]

Quote:

Originally Posted by harley Isn't this dependent on what inflation does in the future? I've been considering VA state and local munis at 5-6%. But I'm worried about going with long maturities because if inflation goes to 10% or more like in the 80s I'd be underwater on them.

If you hold to maturity, then of course inflation doesn't affect your rate of return. I think the key question may be, where else are you likely to get a safe 5-6% return year after year? If you have a somewhat long time horizon, then safety may not be an issue and other asset options, like stocks, are likely a cheap buy right now and may provide greater return in the long-run, if you don't mind the swings.

[socca]

Quinn article on munis: http://www.bloomberg.com/apps/news?p...SGo&refer=home

[summer2007]

Thanks for the replies everyone

I learned a lot reading this thread and looking at the links.

Harley

I agree. Who knows what the future holds...we might see 10% yields in the next few years.


Jim

[brewer12345]

Quote:

Originally Posted by saluki9 Just go for a natural AAA The cat is out of the bag, the insurance is pretty much worthless.

Agree. To expand on what you can buy, if you stick with state general obligation (GO) bonds, you should be OK, at least as far as the conventional wisdom goes. If you know enough anout individual counties, etc. you can look at their GO bonds as well. For example, the county I live in happens to be AAA rated all on its own for GO bonds, and I would not hesitate to buy their bonds.

[summer2007]

How do you know which bonds are considered general obligation?

I looked at some of the municipal bonds for sale but I didn't know if they were considered GO or not.

Jim

[brewer12345]

Quote:

Originally Posted by summer2007 How do you know which bonds are considered general obligation? I looked at some of the municipal bonds for sale but I didn't know if they were considered GO or not. Jim

They will usually be clearly indicated if they are. Rumpus County General Obligation Bond, or some such.

[Rambler]

On the Schwab.com site, they are clearly labeled. I even have some AAs and As and don't feel too worried. I'm not sure how a default would work for a state or a county, but if they completely defaulted, it seems reasonable that no one would ever lend money/buy their bonds again. Orange county CA defaulted some years back...anyone know what happened to their bondholders back then?

R

[Disappointed]

Pleas note that the 5% to 6% is double tax free. While S&P historically returns 9% (I am not sure if it is still true after 2008 figured into the return), the 9% is before income taxes. If you are in a high tax bracket with high state income tax (California), 6% with less volatility and probably less risk is a better deal than the S&P?

Somebody else can give you a better advice than I am, I have started buying muni bonds (CA) this year. While this is considered one of the best opportunities to buy muni bonds because of the unusually high interest offered, it is still hard to find a 5% yield unless you are willing to go out beyond 12 years.

mP

mP

[haha]

Quote:

Originally Posted by Dreamweaver If you hold to maturity, then of course inflation doesn't affect your rate of return.

Unless of course you want to spend the income on something that will be affected by inflation. Like everything.

Ha

[youbet]

Quote:

Originally Posted by Dreamweaver If you hold to maturity, then of course inflation doesn't affect your rate of return.

True. If you hold to maturity and the bond doesn't default, you'll get your principal back. However, if you have a 5%, 10 yr bond and we go into a period of high inflation, say 7%, you'll be holding a bond for 10 years while new issues are undoubtedly being offered with higher coupons than yours. So you bleed to death slowly....... You get your coupon rate of return, as you say, but watch others buying newer bonds with higher coupons.

There's always something........

[youbet]

Quote:

Originally Posted by Disappointed it is still hard to find a 5% yield unless you are willing to go out beyond 12 years.

That's what I'm seeing too. I've looked at Schwab's offerings and don't see the AAA GO bonds at 5% - 6% everyone is talking about unless I go out beyond ten years. Can anyone point me to any being offered at these rates in the five year range?

[Disappointed]

If you have an account at FIDO, you can sign up for automatice alert, they will send you an email whenver new issue comes to the market. I have not seen a AAA GO at 5% shorter than 10 years, but if you are willing to take more risk, AA3 may give you that. Last month I abought a 2032, AAA GO, coupon 4.75, yield 6%, callable in 8 years. Equivalent after tax of about 9%. I figured that I locked it in for 8 years at 6% tax free.

As for inflation, you need to ladder your bond portfolio, those shorter duration will mature and allowing you to buy into higher yield bonds or buy into lower yield bonds if deflation occurs.

mP

[Disappointed]

I just saw Vacaville Calif Unified Sch District - 2036 rated AAA yielding 6% offered on Fido. Callable in 2018. Insured by AGC, I do not know what the underlying credit is?

Anybody researched this, please post.

mP

[Dreamweaver]

Quote:

Originally Posted by Disappointed I just saw Vacaville Calif Unified Sch District - 2036 rated AAA yielding 6% offered on Fido. Callable in 2018. Insured by AGC, I do not know what the underlying credit is? Anybody researched this, please post. mP

Not sure if you found it yet, but Vacaville Unified School District has an underlying GO rating of A+ and an underlying COP rating of A.