Credit enhancement is often used as a synonym for bond insurance, but it is the market liquidity insurers provide that really drives demand for their backing, according to a report issued last week by Roosevelt & Cross Inc.

"Currently, municipal bond insurance has less to do with the underlying credit quality of the insured bond than it does with market liquidity," said Anne Ross, vice president and manager of municipal research at Roosevelt & Cross and author of the report. "The retail market, and even institutions in large part, make investments [in insured bonds] because they don't want to be worried about someone saying ~I don't like the credit anymore.'"

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