Municipal bonds are insured by AMBAC (American Municipal Bond Assurance Corporation), MBIA (Municipal Bond Insurance Association), and FGIC (Financial Guaranty Insurance Corporation).
Are FDIC-insured municipal bonds available?
The Federal Deposit Insurance Corporation (FDIC) insures your bank account assets (checking or savings). SIPC insurance, on the other hand, safeguards your brokerage account assets. These two types of insurance work in completely different ways. Let’s look at how they safeguard you.
What is FDIC insurance?
The Government Deposit Insurance Corporation (FDIC) is a federal agency that protects customers in FDIC-insured banks from losing their deposit accounts (such as checking and savings). Here are some key points to remember about FDIC insurance:
- The FDIC’s basic insurance limit for deposit accounts is now $250,000 per account holder per insured bank, and $250,000 for certain retirement funds deposited with an insured bank. These insurance limitations cover both the principal and the interest that has accrued.
- Even if these assets were purchased from an insured bank, the FDIC does not protect money invested in stocks, bonds, mutual funds, life insurance policies, annuities, municipal securities, or money market funds.
Putting your money in an FDIC-insured bank is always a good idea. There’s no need to take undue risks with your emergency fund or short-term funds.
How is FDIC insurance coverage determined?
Each bank’s FDIC insurance limit applies to each account holder. The FDIC defines coverage for various account holders based on some common ownership types as follows:
- A single account is a deposit account (such as a checking or savings account) that is owned by only one person. For all single accounts at each bank, FDIC insurance covers up to $250,000 per owner.
- Deposit accounts held jointly by two or more people are known as joint accounts. For all joint accounts at any bank, FDIC insurance covers up to $250,000 per owner.
- The FDIC insures certain retirement accounts, such as IRAs and self-directed defined contribution plans, up to $250,000 for all deposits in such accounts at each bank.
What is SIPC insurance?
The Securities Investor Protection Corporation (SIPC) is a federally chartered nonprofit membership organization founded in 1970.
SIPC, unlike the FDIC, does not offer blanket coverage. SIPC, on the other hand, protects consumers of SIPC-member broker-dealers if the firm goes bankrupt. Coverage for all accounts at the same institution is up to $500,000 per customer, with a maximum of $250,000 for cash.
SIPC does not provide protection to investors if their investments lose value. This makes logic when you think about it. After all, market losses are an unavoidable component of the investment risk.
Is the government backing municipal bonds?
Despite its involvement in financial insurance, the federal government does not cover municipal bonds. For example, the government backs up U.S. Treasury securities with its full confidence and credit, and federal agencies protect depositors from most financial institutions’ failures. Municipal bond insurance, on the other hand, is left to the commercial sector by the federal government.
How much of the muni bond market is insured?
For one thing, according to Bob DiMella and John Loffredo, co-heads and co-chief investment officers of MacKay Municipal Managers, the initial analysis of muni defaults was done at the height of Covid-19 shutdowns in March. In the meanwhile, not every market niche has been squeezed. Public utilities have fared well, and public schools should profit from the housing market’s sustained strength. Pension plans, on the other hand, have benefited from the rising stock market.
Municipal bonds with an insurance wrapper, however, may be worth a closer look for many investors, particularly those who buy and hold individual bonds.
“It’s a belt and suspenders bond,” DiMella explains. “You have the underlying credit, as well as this financial guarantor as a backstop.”
Bond insurance, as the name implies, ensures that the principal and interest on a municipal bond be paid if the issuer defaults. Before the financial crisis, DiMella notes, such insurance was widely employed, with a handful of companies insuring around 60% of all new municipal bond offerings.
“After the crisis, it literally plummeted off a cliff,” he says, with insurance wraps accounting for a miniscule percentage of the market.
Insured municipal bonds had been slowly resurgent in recent years, but the Covid-19 outbreak has sparked renewed interest, with insured munis accounting for roughly 10% of new muni bonds. To assuage investor concerns about rating downgrades and defaults, more major and high-quality issuers are including an insurance component in new bonds. Most bonds are now insured by two companies: Assured Guaranty and Build America Mutual.
Investors gain from stable ratings, better liquidity, and lower volatility, according to Loffredo.
Of course, insurance is never free. For muni bonds wrapped with insurance, investors will often give up between 10 and 20 basis points (1/10th and 1/20th of a percentage point) of yield. While some investors may object at this tradeoff, particularly in a low-yield situation, buy-and-hold investors may find it well worth their money.
“You don’t have to give up a lot of yield to receive the benefit of stable cash flow,” Loffredo says, adding that high-net-worth clients and family offices have recently showed an increased interest in insured munis.
While municipal bond insurance is a low-cost option for investors who keep bonds until they mature, active investors may benefit from price appreciation.
“We would argue that there is far more value today than there was at the start of the year,” DiMella says. “They’re wider in many situations than they’ve been in many years.”
Almost every section of the muni market was hit when the market first went off this spring. Insured munis recovered faster than comparable bonds, although spreads for triple-B-rated insured munis are still greater now than they were at the start of the year.
In fact, the guaranteed index’s gap over 10-year Treasuries started the year at 20 basis points and quickly grew to 190 basis points during the spring market turmoil. They’ve now reduced to 99 basis points, but the spread is still wider today than it was before the crisis, implying that rates will fall and bond prices will rise.
What motivates insurance firms to purchase 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.
Is the FDIC insure TD Ameritrade?
Certificates of Deposit (CDs) issued by institutions insured by the Federal Deposit Insurance Corporation (FDIC) are available through TD Ameritrade (FDIC). Additionally, you can keep funds in your account in a TD Ameritrade FDIC Insured Deposit Account (IDA).
The FDIC does not protect which of the following?
Institutions are increasingly giving consumers a wide range of non-deposit investment products, such as mutual funds, annuities, life insurance plans, stocks, and bonds. These non-deposit investment products, unlike standard checking and savings accounts, are not insured by the FDIC.
Mutual Funds
Mutual funds are occasionally preferred above other investments by investors, presumably because they guarantee a larger rate of return than, say, CDs. And, because you own a piece of a lot of companies rather than a chunk of a single enterprise, your risk – the chance of a company going bankrupt, resulting in the loss of investors’ assets – is spread out further with a mutual fund, such as a stock fund. A mutual fund management can invest the money of the fund in a number of industries or multiple companies within the same industry.
Alternatively, you might put your money in a money market mutual fund, which invests in short-term CDs and assets like Treasury bills and government or corporate bonds. A money market mutual fund is not to be confused with an FDIC-insured money market deposit account (explained above), which earns interest at a rate set by the financial institution where your funds are put and paid by them.
Before investing in a mutual fund, you can – and should – receive definite information about it by reading a prospectus, which is accessible at the bank or brokerage where you wish to conduct business. The most important thing to remember when buying mutual funds, stocks, bonds, or other investment products, whether at a bank or elsewhere, is that the funds are not deposits, and hence are not insured by the FDIC or any other federal agency.
Securities held for your account by a broker or a bank’s brokerage division, including mutual funds, are not protected against loss of value.
The market demand for your investments might cause the value of your investments to rise or fall.
If a member brokerage or bank brokerage subsidiary fails, the Securities Investors Protection Corporation (SIPC), a non-government institution, replaces lost stocks and other securities in customer accounts held by its members up to $500,000, including up to $250,000 in cash.
For additional information, please contact:
Treasury Securities
Treasury bills (T-bills), notes, and bonds are examples of Treasury securities. T-bills are often obtained through a bank or other financial institution.
Customers who buy T-bills from failing banks are anxious because they believe their actual Treasury securities are held at the collapsed bank. In fact, most banks purchase T-bills by book entry, which means that an accounting entry is kept electronically on the Treasury Department’s records; no engraved certificates are given. The consumer owns the Treasury securities, and the bank is only serving as a custodian.
Customers who bought Treasury securities from a bank that goes bankrupt can get a proof-of-ownership document from the acquiring bank (or the FDIC if there isn’t one) and redeem the security at a Federal Reserve Bank near them. Customers can also wait for the security to mature and get a check from the acquiring institution, which may become the new custodian of the collapsed bank’s T-bill client list automatically (or from the FDIC acting as receiver for the failed bank when there is no acquirer).
Despite the fact that Treasury securities are not covered by federal deposit insurance, payments of interest and principal (including redemption proceeds) on those securities that are deposited to an investor’s deposit account at an insured depository institution are covered by the FDIC up to a limit of $250,000. Even though Treasury securities are not insured by the federal government, they are backed by the United States government’s full faith and credit, which is the best guarantee available.
Safe Deposit Boxes
The FDIC does not protect the contents of a safe deposit box. (Read the contract you signed with the bank when you rented the safe deposit box to see whether any form of insurance is given; depending on the circumstances, some banks may provide a very limited reimbursement if the box or contents are damaged or destroyed.) If you’re worried about the safety or replacement of valuables you’ve stored in a safe deposit box, fire and theft insurance can be a good idea. Separate insurance may be offered for certain dangers; check with your insurance agent. Typically, such coverage is included in a homeowner’s or renter’s insurance policy for a property and its contents. For further information, contact your insurance representative.
In the event of a bank failure, an acquiring institution would most likely take over the failing bank’s offices, including safe deposit box sites. If no acquirer is located, the FDIC will issue instructions to boxholders on how to remove the contents of their boxes.
Robberies and Other Thefts
A banker’s blanket bond, which is a multi-purpose insurance policy purchased by a bank to defend itself from fire, flood, earthquake, robbery, defalcation, embezzlement, and other causes of losing funds, may cover stolen funds. In any case, a fire or a bank robbery may result in a loss for the bank, but it should not result in a loss for the bank’s clients.
If a third party acquires access to your account and transacts business that you do not approve of, you must notify your bank as well as the appropriate law enforcement authorities in your area.
Not FDIC-Insured
- Whether purchased from a bank, brokerage, or dealer, mutual funds (stock, bond, or money market mutual funds) are a good way to diversify your portfolio.
- Whether purchased through a bank or a broker/dealer, stocks, bonds, Treasury securities, or other investment products
For More Information from the FDIC
Monday through Friday, from 8 a.m. to 8 p.m. Eastern Time, dial 1-877-ASK-FDIC (1-877-275-3342).
Request a copy of “Your Insured Deposits,” which covers all of the ownership categories in detail, or contact 1-877-275-3342 toll free.
Use the FDIC’s on-line Customer Assistance Form to send your queries by e-mail: FDIC Information and Support Center
This website is meant to provide non-technical information and is not intended to be a legal interpretation of FDIC laws and practices.
Which banks aren’t covered by the FDIC?
The Bank of North Dakota, for example, is a state-run institution that is insured by the state rather than any federal entity. If you open an account at a bank outside of the United States, it will not be covered by the FDIC, but it may be covered by the deposit insurance of its native country.