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Municipal Bond Forum
FMSbonds, Inc.'s Bond Forum™ is an exclusive opportunity for investors to submit questions and comments on the bond market or to respond to one of our articles.
To participate, just send us an e-mail. Be sure to include your name or initials and your state of residence. Posted e-mails may be edited for length and clarity. If you prefer a private response, please note that in your e-mail. Responses are provided by James A. Klotz, president and co-founder of FMSbonds, Inc., a municipal bond specialist for more than 35 years; Dr. Jay H. Abrams, chief municipal credit analyst; and other members of the firm as noted.
Postings are listed by date. You may also view postings by topic using the search box below. If you have any questions, please call us at 1-800-FMS-BOND (367-2663) or e-mail us.
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The support behind bond insurance
8/19/2009What is the nature of the insurance that insured municipal bonds carry?
- A.K., MichiganBond insurance is supported by a combination of hard capital on the books of the bond insurers, as well as other forms of credit support, including re-insurance, lines of credit and other support traditional to the overall insurance industry. Bond insurers are regulated by state insurance regulators, who set the capital requirements necessary for the insurers to do business within their respective states.
Many Ambac-insured bonds are investment-grade quality
8/11/2009It’s my understanding that any bond that was insured by Ambac without a rating is considered speculative, especially for possible resale, with little or no market. Is that correct?
- D.W., CaliforniaThis is not necessarily the case. As we have said, many Ambac insured bonds are of investment grade quality but are nonrated because the issuer never applied for a rating.
On FMSbonds’ offerings, all nonrated securities carry the speculative legend automatically. Each bond, however, needs to be analyzed individually.
Our chief analyst, Dr. Jay Abrams, elaborates on this topic in his recent article titled “The Muni Market: Where We Really Are Now.”
Although brokers may currently be a bit gun shy, eventually these bonds will trade based on their underlying quality.
Ambac, for the most part, insured municipal bonds with investment grade characteristics.
Rating agencies
7/23/2009I have been investing with FMSbonds since January of this year and am wondering how rating agencies (Moodys, S&P etc.) are held accountable for the ratings that are placed on the bonds. Can they be held legally responsible if they rate a bond “AA” and it defaults, or are they immune from legal prosecution for their services?
- C.M., New JerseyAlthough we are not qualified to advise on legal matters, our guess is the disclaimers that accompany these agencies' ratings make them immune from legal action.
Most of the collateralized debt obligations (CDOs), which contained the now infamous "toxic subprime mortgage debt," were originally rated “AAA.” We are not aware of any legal ramifications stemming from this catastrophic miscalculation.
Despite their obvious failings, we believe the rating agencies have generally provided a valuable service to municipal bond investors over the years, but clearly, ratings should not be considered the last word when making your buying decisions.
Although it sounds self serving, this is why we believe it is more important than ever to do business with a municipal bond specialist who understands and can explain the security behind the bonds you contemplate adding to your portfolio.
Thank you for the confidence you have shown in us.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.