Tuesday, June 24, 2008

Bond Insurance

Last week, Moody's cut the ratings of the bond insurance companies MBIA and AMBAC by two and one notch, respectively. I am really not sure that Joe Investor comprehends the meaning of this. Sure, the financials dragged down the stock market the day the news came out and we can argue that everyone saw it coming but come on people. Your nice safe AAA rated municipal bonds and all those insured bond funds in your IRAs are not what they once were.

First of all, prices of these formerly top rated securities take a big hit when they get downgraded. Think of it as your house - I looks nice and it does you right but try to sell it for any reason and you get clobbered.

I like how the CEO of AMBAC bought 10,000 shares of his company today. Normally, that would be a great bit of insider info (the legal kind) but when your company is trading at a whopping $2 per share your big vote of confidence totals $20,000. Big whoop.

You can afford more, Mr. CEO. How about some real money - 50,000 shares? 100,000 shares? That would make a statement.

No, I don't think that this is an encouraging bit of news at all.

Oh, and check out the divdend yield of MBIA - 28.3%! Where do I sign up? Surely, I do not have to worry about that dividend being cut, do I? (Who has a bridge for sale? I'm in the market).

So back to the ramifications of the "expected" downgrade of the bond insurers. What yolu've got just lost money. But the good news is what you can get new just got cheaper.

I'd love to post a Bond Buyer Rev bond index vs. treasuries so if someone can point me to the data that would be great. Same for any muni housing bond index. I remember back in the 1980s when these puppies were being called left and right leaving investors with little to show for the risk.

3 comments:

brianmb1234 said...

Does anyone have any in-depth advice on insurance bonds?

I've been looking around the market for a few weeks now but to no avail, so any help would be much appreciated!

Quick Takes Pro said...

Looks both interesting and scammy. Sorry not to be of any help

Alan krita said...

You really write a perfect blog post on insurance bonds. I was looking for the same from the past few days. Glad to receive this blog post. Thanks for sharing.

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