Municipal Bond Forum
ETM munis
Q
I own a number of zero coupon non-callable munis that are Escrowed to Maturity (ETM) in U.S. Treasurys. All mature in the next 2 to 17 years. Additionally, they are insured (although the value of that insurance may now be dubious). Given that U.S. Treasurys are rated “AAA” at the moment, why are all the muni ratings (underlying and otherwise) below that (typically “BBB” in my case)?
A
James A. Klotz responds:
Typically when municipal bonds are refinanced and escrowed in U.S. Treasury securities, the underwriters opt not to have the refunded issue re-rated because the quality is understood to be “AAA” by the market and there is a cost to rate these issues.
Many of your insured holdings likely carried higher ratings before some of the insurance companies were downgraded because of their mortgage bond exposure.
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