Municipal Bond Forum
Leverage funds face risk similar to those that led to 2008 debacle
Q
Could you describe the importance of insured muni bonds? What exactly do they insure? Also, just how dangerous do you consider leveraged funds to be? Is the risk with these funds worth the extra high yields?
A
James A. Klotz responds:
Although municipal bond insurance is far less prevalent in today’s municipal market than it was prior to the financial crises in 2008, it still can provide an added degree of protection to investors. It insures the investor for the timely payment of principal and interest.
Bond insurance, however, is only as good as the quality of the insurer.
The danger in leveraged funds is similar to the perils that brought about the financial crises. When assets are purchased with borrowed money, a dramatic rise in borrowing costs or a sudden decline in the market value of the leveraged assets can lead to substantial disruptions. The housing market and the Lehman Brothers collapse are conspicuous examples.
Leveraged funds differ from individual bonds in two other important ways. There is no maturity date, which means no promise to return full principal. They also do not offer call protection to guard against dividend reductions.
Start here.
Do you have specific criteria for bonds you’re looking for? Let us know and we’ll e-mail you bonds that fit your needs. There is no charge for this service.
The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.