Are Insured Puerto Rico Bonds Safe?

Assured Guaranty Ltd. (NYSE: AGO) and two of its bond insurance subsidiaries (collectively, Assured Guaranty) made claim payments to holders of insured general obligation and other obligations on which Puerto Rico and several of its instrumentalities defaulted on July 1, 2019. The defaulting issuers, total payments due on bonds covered by Assured Guaranty Municipal Corp. (AGM) and Assured Guaranty Corp. (AGC), and total gross and net claim payments made by Assured Guaranty are included in the table below. Municipal Assurance Corp. (MAC), a subsidiary of Assured Guaranty, has no guaranteed exposure to Puerto Rico.

Investors who possess Assured Guaranty-insured Puerto Rico-related bonds continue to receive uninterrupted full and timely payment of scheduled principal and interest, as per the provisions of Assured Guaranty’s insurance policies.

Investors in Assured Guaranty-insured bonds do not need to take any action to receive their scheduled debt service payments because the relevant bond trustee, paying agent, or, in the case of secondary market policies, custodian files the claim on behalf of the bondholders with Assured Guaranty. When Assured Guaranty receives a claim from a bond trustee, paying agent, or custodian, it pays the claim directly to that party, who then distributes the funds to investor accounts in the same way that the issuer did. Assured Guaranty pays claims no later than one business day after they are received, but not before the payment due date, under its regular municipal bond insurance coverage.

For Puerto Rico-related bonds insured by Assured Guaranty, the following table shows the amounts due on July 1, 2019, and related claims paid, as well as cumulative claims paid or expected to be paid since January 2016.

As of July 2, 2019, Assured Guaranty had received $267 million in claim notices for principal and interest payments due on July 1, 2019. The payments or balances of payments were made by the obligor, or from the obligor’s available reserves, or by the primary insurer, for any obligors for whom Assured Guaranty paid no claims or only partially paid claims.

* Aggregate data for the Assured Guaranty Ltd. group’s operating entities. Claims on each subsidiary’s insurance policies/guarantees are paid out of its own claims-paying resources. The most recent Assured Guaranty Ltd. Financial Supplement contains details on the components of claims-paying resources.

The above information includes forward-looking statements that reflect Assured Guaranty’s current views on future events and are made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that might cause actual outcomes to differ considerably from those projected. These risks and uncertainties include, but are not limited to, those resulting from Assured Guaranty’s inability to execute its strategies, including its loss mitigation and risk remediation strategies, as well as negative developments that may impact Assured Guaranty’s liquidity and capital, and thus its ability to make claim payments on time and in full, such as lower demand for Assured Guaranty’s financial guaranty product, or adverse developments with respect to its iShares product. Readers should not place undue reliance on these forward-looking statements, which were issued on July 3, 2019. Except as required by law, Assured Guaranty assumes no duty to publicly update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise.

Are any bonds insured?

The Federal Deposit Insurance Corporation insures most bank accounts, ensuring that your money is safe (FDIC). Savings bonds in the United States are similarly safe, but they are not insured by the Federal Deposit Insurance Corporation (FDIC). Savings bonds are backed by the United States government’s full faith and credit.

Which government bonds are best to buy?

The risk tolerance, time horizon, and long-term financial goals of an investor all play a role in determining the best bonds to buy. Bond funds, such as exchange-traded funds, comprise a basket of debt securities, and some investors may choose to invest in them. Treasury securities and municipal bonds, which are issued by local state governments, are good choices for investors looking for safety and tax savings. Corporate bonds can offer a larger return or yield, but the issuer’s financial health must be taken into account.

Are municipal bonds a good investment in 2021?

  • Municipal bond interest is tax-free in the United States, however there may be state or local taxes, or both.
  • Be aware that if you receive Social Security, your bond interest will be recognized as income when determining your Social Security taxable amount. This could result in you owing more money.
  • Municipal bond interest rates are often lower than corporate bond interest rates. You must decide which deal offers the best genuine return.
  • On the bright side, compared to practically any other investment, highly-rated municipal bonds are often relatively safe. The default rate is quite low.
  • Interest rate risk exists with any bond. You’ll be stuck with a bad performer if your money is locked up for 10 or 20 years and interest rates climb.

Investment grade municipal bonds are very safe, but FDIC-insured CDs are safer.

Your money is federally protected up to $250,000 when you buy a CD from a U.S. bank. The federal government is practically guaranteeing that you’ll get your entire deposit back, plus any interest you’ve earned. This federal guarantee does not apply to municipal obligations. Municipal bonds have an extremely low default rate, yet they do default on occasion. Out of the approximately 10,000 investment grade bond issues graded by Standard & Poor’s, four defaulted in 2012. Defaults did occur, despite the fact that the number represented was less than 0.1 percent. Because CDs are safer than bonds, buying CDs instead of municipal bonds would make sense if the CDs offered the same or better after-tax returns.

Why are municipal bonds default to free?

  • Municipal bonds are a wonderful option for consumers who want to keep their money while earning tax-free income.
  • General obligation bonds are used to quickly raise funds to cover expenses, whereas revenue bonds are used to fund infrastructure projects.
  • Both general obligation and revenue bonds are tax-free and low-risk investments, with issuers who are quite likely to repay their loans.
  • Municipal bonds are low-risk investments, but they are not risk-free because the issuer may fail to make agreed-upon interest payments or be unable to repay the principal at maturity.

Is income from municipal bonds taxable?

Residents of the issuing state are generally excluded from federal and state taxes on income earned from municipal bonds. While interest income is tax-free, any capital gains delivered to the investor are taxable. The Federal Alternative Minimum Tax may apply to some investors’ earnings (AMT).

Why do insurance companies buy municipal bonds?

Municipal bonds, with their particular credit profile, can help diversify credit risk in broad fixed income portfolios. Municipal exposure allows insurers to keep their rating quality high without sacrificing significant profits.