Many Assurances?

Is bond insurance coming back?

One of the more prominent casualties of the financial crisis the bond insurance industry. Before 2007–for a modest fee–issuers could have a third party evaluate their credit and underwrite their bonds. By virtue of low default and high recovery rates among the insured, insurers’ capital could transform otherwise marginal credits into AAA bonds.

70% of munis are held by individuals, so it seemed like a perfect business. Investors would buy the bonds; the insurers would do the analysis. But the insurers tried to expand, and the model that worked so well with munis blew up with mortgages. They were all downgraded, and then no one cared about bond insurance. Some insured bonds actually traded at higher yields than uninsured counterparts–for the same credit!

But it looks like people are beginning to care again. Detroit’s 18 billion-dollar bankruptcy has gotten investors’ attention. While the city and other bond issuers–Yankee Stadium parking lot bonds come to mind–may suspend payment of principal and interest, insured bonds keep right on paying. The insurer is on the hook, and unless there’s a haircut, they’ll eventually get paid back.

It’s one more way the financial markets are showing signs of healing. It’s just ironic that for the marketplace to get better, a big borrower has to get sick.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-08-21T09:29:22+00:00 August 21st, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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