As I mentioned yesterday, the largest insurers of municipal bonds, MBIA Inc. (Symbol: MBI) and Ambac Financial Group Inc. (ABK), were hit right where it hurts by Standard & Poor’s. The rating agency said yesterday it had put a “negative outlook” on the two firms’ AAA rating. Hundreds and hundreds of billions of dollars worth of muni bonds are considered AAA because the issuers paid to have MBIA or Ambac back up the payments in case of a default. If the bond insurers are eventually downgraded, so too are the bonds they backed.
You might think the municipal market would freak at the threat of a loss of all those AAA’s. You’d be wrong. As my long-ago-employer, the Bond Buyer newspaper, reported, there was hardly a ripple from the rating news. Barclays’ iShares S&P National Municipal Bond Exchange-Traded Fund (Symbol: MUB) lost just 63 cents today to close at $101.29.
Why no bigger reaction? For one, as the Bond Buyer reported, the market was anticipating the news and has been weak for a while. The strength of the muni bond insurers is in question because of policies they wrote backing crummy subprime mortgage securities, not muni bonds. Subprime problems have been in the news, at the top of the news really, for months now. Also, as my colleague Ben Steverman points out in a BW online story today, municipal bond issuers almost never default, no matter what their ratings are. The amount of value added by bond insurance is highly debatable. And finally, as my former boss at that former job at the Bond Buyer, current Bloomberg columnist Joe Mysak, pointed out the other day, the rating agencies are giving the major muni insurers time to work things out, to get capital infusions and otherwise clean up their acts. Ambac and MBIA now have a powerful incentive to fix their problems and shore up their balance sheets. Let’s hope they get the message.