Insurance added to good yields gives municipal bonds new appeal
Put a scare in the securities markets, and you'll see several reactions. One might be heavy withdrawals from a savings-and-loan in Ohio. Another might be higher interest rates that have to be paid by electric utilites. A third might be more interest being expressed in insured financial products. That last reaction seems to be what's happening to the market for municipal bonds and for packages of those bonds, known as municipal bond funds and unit investment trusts (UITs).
For the first quarter of this year, sales of insured UITs passed uninsured UITs, taking in $1.87 billion, compared with $1.28 billion for trusts without insurance. This represented a 46 percent jump for insured UITs, according to Van Kampen Merritt Inc., a Naperville, Ill., municipal bond brokerage. It also represented the first quarter when sales of insured trusts exceeded their noninsured cousins, says Thomas Littauer, national sales manager at Van Kampen, a Xerox subsidiary.
The reasons for the growth in insurance vary, depending on whom you talk to. The results, however, are the same: Investors can now get competitive yields on municipal bonds that carry the usual guarantees of the issuer, plus the extra security of insurance.
``In the last two years, people have seen a number of good reasons for insurance,'' Mr. Littauer says. True, it has been a while since the Washington Public Power Supply System, commonly known as ``Whoops,'' defaulted on bonds used to finance unbuilt nuclear power plants. But the collapse of the Florida-based ESM Securities and the problems that collapse caused for bank customers in Ohio is still very fresh in people's minds. So is the failure of nearly 80 banks in 1984.
``A number of things that have happened in the last year especially have moved ahead the general trend of more conservative investing,'' Littauer observes.
On the other hand, more insurance itself may have done much to advance the sale of insured products. Until a year or two ago, there were only two major insurers that protected creditworthy bonds against default. They are the Municipal Bond Insurance Association and the American Municipal Bond Assurance Corporation.
Now we also have the Financial Guaranty Insurance Corporation, the Bond Insurance Guaranty Corporation (BIG), and, to a lesser extent, Industrial Indemnity. The largest of these are consortia of major brokerages that deal in municipal bonds and so have a stake in making their products as attractive as possible.
The growth of insurance has not only resulted in the sales of more insured products, says Betty Ganser Rubin, a spokeswoman for John Nuveen & Co., a municipal bond broker, it has also reduced the yield investors have to give up to get this kind of protection.
A few years ago, you would lose one to two percentage points if you wanted insured bonds. Now, Ms. Rubin says, the sacrifice is more on the order of 17 to 40 basis points (there are 100 basis points in each percentage point). A difference of 30 basis points, then, amounts to less than one-third of a percentage point lower yield.
Besides letting the investor sleep better at night, insurance can also make the securities, particularly trusts, more stable and easier to sell. If the bonds in the UIT are insured to maturity, each individual bond in the portfolio is insured for its entire life. This usually gives the trust a top AAA (or Aaa) rating by Standard & Poor's and Moody's, the two big bond rating firms.
These high ratings, Rubin says, mean that when investors want to sell their UIT shares, they will receive the full current value for them. If the bonds in the portfolio are insured only while they are in the trust, you may not always receive top dollar.
Remember, too, if you are buying single insured bonds, insurance covers you only if the issuer defaults, not if you sell the bonds before maturity and have to take a loss. In the same way, insurance on UITs will not keep the market value of the bonds in the UIT portfolio from shifting. It can only ensure that if an issuer of one of the bonds defaults, the principal and interest will be paid.
The minimum investments on UITs vary. At Van Kampen, for instance, it's $1,000; at Nuveen, it's $5,000. Stocks in street name
We have an account with a brokerage company that is holding our stock in a street name. We like getting the monthly report and having the dividends go into our account. However, we are concerned about the safety of this stock, should the brokerage go bankrupt. Would it be safer to have the stock in our own name?-- F. K.
It shouldn't make any difference, says Kevin Bell, assistant general counsel for the Securities Investor Protection Corporation (SIPC), the agency that insures brokerage accounts. Much as the Federal Deposit Insurance Corporation insures bank accounts up to $100,000, SIPC insures brokerage accounts, but to a higher limit of $500,000. This includes stocks held in the street name.
Such stocks are officially held in the broker's name rather than the customer's. This makes it easier to transfer the stocks. Otherwise, Mr. Bell says, you would have to go to the broker and sign the stock certificates first, which might make a timely sale difficult.