The latest innocent bystanders caught in the subprime-mortgage crossfire are holders of insured municipal bonds. These normally safe bonds have top triple-A ratings because their issuers bought insurance that guarantees payment of principal and interest.

Problem is, the same insurers who stand behind tax-free munis have also backed troubled bond issues tied to subprime mortgages. Some of those insurers are now in danger of losing their own triple-A ratings, which means the bonds they guarantee would no longer carry the top rating. If that were to happen, holders of insured munis would still receive interest payments, but the market value of the bonds would dip to reflect the increased — though still remote — risk of default.

If you're in the market for munis, you could avoid insured bonds and buy only those bonds that are triple A-rated on their own merits. But demand for those relatively scarce bonds is high, so you'll have to pay higher prices and settle for lower yields to get them, says Josh Gonze of Thornburg Investment Management.

Paradoxically, many insured bonds are good values now because they've lost value. But buying an insured bond nowadays requires a keen understanding of the issue's underlying quality as well as the financial strength of the insurer. It's a task better left to the pros.

Money-market funds are another casualty of the subprime-mortgage blowup. Sponsors, including Bank of America and U.S. Bancorp, have had to bail out at least seven money funds that invested in exotic securities tied to mortgages made to less-than-stellar borrowers.

There was some risk that without assistance from their advisers, the net asset value of these funds might slip below $1 a share. Individual investors have never lost a penny of principal in money funds since their invention in 1970.

With more than $3 trillion in assets in money funds, sponsors will do what it takes to dodge a black eye. To avoid "breaking the buck," sponsors may have to absorb losses of up to $150 million, less than half of one day's interest income from all of the nation's money funds.

If you are really worried, says Peter Crane, founder and president of Crane Data, move to money funds that buy debt backed by the U.S. government, or to FDIC-insured bank accounts or certificates of deposit.


David Landis is a contributing editor and Joan Goldwasser is senior reporter at Kiplinger's Personal Finance magazine. Send your questions and comments to [email protected]