Demand for municipal bond insurance is poised to increase as rising interest rates reduce investor appetite for riskier state and local debt, according to Janney Montgomery Scott.
Bond insurance accounted for 4.4 percent of new muni issuance last quarter, up from 3.6 percent in 2013, Alan Schankel, managing director at Philadelphia-based Janney, wrote in a report April 9. The market share may reach 8 percent this year, according to Standard & Poor’s.
“The use and acceptance of municipal bond insurance to wrap municipal issues will likely increase in coming months and years, especially as rates rise and credit spreads widen,” Schankel wrote in the report.
Insurance covered almost 60 percent of issuance in 2005, according to Janney. Use of the protection fell after the companies were largely stripped of their top ratings in 2008 amid losses on guarantees of subprime-mortgage-backed debt.
S&P last month raised subsidiaries of Assured Guaranty Ltd. to AA, the third-highest level, and MBIA Inc.’s National Public Finance Guarantee Corp. to AA-, one step lower, citing better prospects for muni insurance.
Investors have been buying lower-rated munis for their higher relative yields as interest rates on local debt remain close to the lowest since June. Benchmark 10-year munis yield about 2.5 percent, data compiled by Bloomberg show.
That demand may reverse as most Wall Street analysts predict yields will rise as the economy strengthens.
Yields on 10-year Treasuries will climb by 0.91 percentage point to 3.63 percent a year from now, according to the median forecast of 60 analysts in a Bloomberg survey.