The Price of Safety: The Evolution of Insurance Value in Municipal Markets
58 Pages Posted: 19 Oct 2018 Last revised: 9 Jun 2019
Date Written: June 5, 2019
We examine the benefits of bond insurance to taxpayers using comprehensive data and selection models to control for fundamentals and the endogenous choice to insure. Prior to 2008, when insurance provided AAA coverage, insurance saves issuers 9 bps, on average. Because the monolines were downgraded in 2008-2009 and because general obligation bonds were upgraded due to Moody's scale recalibration in 2010, the distance between the credit quality of the insured issuers and of the available insurance shrinks from both sides. Since 2008, insurance is associated with offering yields 4 bps higher than otherwise similar uninsured issuers; only the lowest-rated issuers obtain gross benefit. Although prior evidence from secondary markets suggests that insurance generally provides value to investors, our results from primary markets indicate that insurance generally provides no value to taxpayers who pay the premiums.
Keywords: bond insurance, municipal bonds, yield inversion, municipal market liquidity, propensity score matching IPWRA
JEL Classification: G01, G12, G22, H74
Suggested Citation: Suggested Citation