Sat. May 30th, 2020

Insured municipals offer investors additional assurance

5 min read
Insured municipals offer investors additional assurance

Benjamin Franklin famously
declared: “In this world, nothing can be said to be certain, except death
and taxes. For investors looking to lessen the impact of taxes, municipal bonds may be particularly attractive — their interest
income is often exempt from federal taxes and may be exempt from state and
local taxes as well. And for those who are looking for extra assurance
regarding the certainty of their income, insured municipal bonds may provide a
solution.

What are insured muni bonds?

Insured municipals are a
niche market, accounting for
6% of all municipal issuance so far in 2019.1 But, they provide
assurance that a bond’s interest and principal will be paid on time — even if
the issuer defaults.

How does this work? Municipal bond insurance
companies issue policies that guarantee that they will make timely interest and
principal payments on those insured bonds in the event that the issuer
defaults. The cost of the policy is reflected in the bonds’ yields — an insured
bond will typically have a somewhat lower yield than an identical uninsured
bond. However, the true value of the policy can be seen if an issuer gets into
financial trouble. 

The chart below shows pricing for two Chicago Board of Education general obligation bonds. The bonds have identical terms, but one is uninsured and the other is insured by Assured Guaranty. Over the last five years, Chicago Board of Education has been downgraded multiple notches, causing investors to be concerned about future payments.  During this time the insured bonds did not trade below $99.50, whereas the uninsured bonds traded as low as $73.50, highlighting the potential value of the insurance.

Source: Bloomberg, L.P. as of Sept. 16, 2019.

Who insures muni bonds?

A key concern for investors, of
course, is that these insurance companies are financially stable. As the table
below shows, even after the high-profile municipal defaults of Detroit and
Puerto Rico general obligation bonds in 2013 and 2016, the credit ratings of
three major municipal bond insurance companies indicate that they are stable.

Assured Guaranty (AA/stable) — a
municipal bond insurer with exposure to Puerto Rico — had its ratings affirmed
by Standard & Poor’s (S&P) in June 2019. Build America Mutual
(AA/stable), a municipal bond insurer with no exposure to Puerto Rico, also had
its ratings affirmed by S&P in June 2019.

Insurer S&P Rating Market Share
Assured
Guaranty
AA
/ Stable
52.4%
Build
America Mutual
AA
/ Stable
44.4%
Municipal
Assurance Corp. (subsidiary of Assured)
AA
/ Stable
3.2%

Sources: Ratings information
from S&P, data from Thomson Reuters as of Aug. 31, 2019

How does the insurance process
work?

Bonds can be insured at the time
they are issued or afterward. At Invesco Unit Trusts, we carefully assess the
fundamentals of bonds that are already insured. We also seek to leverage our
strong relationships with broker-dealers and municipal bond insurance firms to
create unique and attractive opportunities for muni bond investors. How do we
achieve this?

  • We work with broker-dealers to identify attractive, favorably priced bonds that are not insured.
  • We identify insurance companies that are willing to insure that specific bond, and seek to negotiate the best price possible for the policy.
  • We then purchase the “new” insured bond from the broker-dealer.

Talk to your advisor

Talk to your financial advisor and explore the Insured Municipals Income Trust, a diversified portfolio of insured muni bonds that provides investors with professional bond selection and ongoing active surveillance based on the underlying credit quality of each municipal issuer.

1 Source: Thomson Reuters, “The
Municipal Market Monitor (TM3),” Aug. 31, 2019

Important Information

Blog header image: Etienne
Boulanger/Unspash.com

A bond issuer may cease to be rated or its
ratings may be downgraded. Such action may adversely affect the value of the
bonds in the trust and the value of the units.

Municipal securities are subject to the risk
that legislative or economic conditions could affect an issuer’s ability to
make payments of principal and/or interest.

There is no assurance that a unit
investment trust will achieve its investment objective. An investment in this
unit trust is subject to market risk, which is the possibility that the market
values of securities owned by the trust will decline and that the value of
trust units may therefore be less than what you paid for them. This trust is
unmanaged. Accordingly, you can lose money investing in this trust.

An investment in a trust should be made
with an understanding of the risks associated therewith, such as the inability
of the issuer or an insurer to pay the principal of or interest on a bond when
due, volatile interest rates, early call provisions and changes to the tax
status of the bonds.

The financial condition of an issuer may
worsen or its credit ratings may drop, resulting in a reduction in the value of
your Units. This may occur at any point in time, including during the primary
offering period.

The value of the bonds will generally fall
if interest rates, in general, rise. In a low interest rate environment risks
associated with rising rates are heightened. The negative impact on fixed
income securities from any interest rate increases could be swift and
significant. No one can predict whether interest rates will rise or fall in the
future.

The trust may realize gains when a
municipal bond is sold, is called, or matures and unitholders may incur a tax
liability from time to time.

The insurance provides coverage for the
bonds held by the trust, not on units of the trust.

Invesco and its
representatives do not provide tax advice. Individuals should consult their
personal tax advisors before making any tax-related investment decisions.

Please see the
Information Supplement for a discussion of situations in which the Trust may
designate previously distributed interest income during the year as taxable net
capital gain in order to satisfy certain of the annual distribution requirements
for regulated investment companies.

A credit rating
is an assessment provided by a nationally recognized statistical rating
organization (NRSRO) of the creditworthiness of an issuer with respect to debt
obligations, including specific securities, money market instruments or other
debts. Ratings are measured on a scale that generally ranges from AAA/Aaa
(highest) to D/C (lowest); ratings are subject to change without notice. For
more information on Standard and Poor’s rating methodology, please visit www.standardandpoors.com
and select “Understanding Ratings” under Rating Resources on the
homepage or Moody’s at www.moodys.com and select “Rating
Methodologies” under Research and Ratings on the homepage.

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