A Rockier Road for Muni Money Market Funds

Posted by: Lauren Young on February 1, 2008

Standard & Poor’s just announced that that it has changed the fund credit quality ratings on the Van Kampen California Insured Tax Free Fund and the Van Kampen Insured Tax Free Income Fund to ‘AAf’ from ‘AAAf’.

S&P says: “Today’s rating actions are largely based on the change of the financial enhancement rating of Financial Guaranty Insurance Co. (FGIC) to ‘AA/Watch Dev/—‘from ‘AAA/Watch Neg/—’. The two rated Van Kampen funds’ exposure to municipal bonds insured by FGIC and other non ‘AAA’ rated securities has moved the average credit quality of the funds into the ‘AA’ category. Current investment guidelines allow for the purchase of investment-grade securities (i.e. ‘BBB-’ or better).”

If you check out my story about muni money market funds in this week’s issue of BusinessWeek, you’ll get a better handle on why this is happening. I wouldn’t be surprised if more tax-free funds get hit with downgrades in the coming weeks.

It’s going to be a rocky period for the munis.