What it means
The index is published by The Bond Buyer, a long-standing municipal market newspaper, which also maintains a broader 20-bond version. The 11-bond index is drawn from the higher-rated names within that wider group, so it reflects the cost of borrowing for issuers with stronger credit.
Each constituent is a long-dated general obligation bond from a different issuer, and the index is simply the average of their yields. The figure is published regularly, which turns a scattered, thinly traded market into a trackable series.
It matters because the municipal bond market has no single screen price. A city treasurer planning an issue uses the index to estimate the yield investors will demand, and then adds or subtracts for the city's own credit rating, the maturity offered and local demand.
Investors use it as a reference point in the other direction. If a new bond is offered at a yield well above the index, the buyer should ask what the market sees in that issuer that justifies the extra, and if it is well below, whether the price is simply rich.
Because it is a yield index rather than a price index, a falling value means borrowing has become cheaper and existing bond prices have risen. That inverse relationship is the single most common source of confusion for people new to bond market data.
The nuance is that the index is an average of a small, selected sample, and it is published as an indication rather than a tradeable price. Index levels also move with general interest rates set by monetary policy, so the figure should always be read as of a particular date rather than treated as a fixed rate.
In practice
Real-world examples.
Example
A county finance officer preparing a school building issue tracks the index weekly for three months before pricing. When the level falls by 0.25 percentage points she brings the sale forward, saving roughly $500,000 of interest over the life of a $20,000,000 issue.
Example
A wealth adviser reviewing a client's holdings compares the yield on each municipal bond in the account with the index level at the time of purchase. Two bonds bought well below the index turn out to have been expensive relative to the market, which prompts a review of the broker who sold them.
Example
An analyst writing a market commentary notes that the 11-bond index and the broader 20-bond index have moved apart. The widening gap tells readers that investors are demanding more extra yield from weaker municipal credits than they were a quarter earlier.
Formula
Calculation
Index level = sum of the 11 constituent yields divided by 11. Take an illustrative set of yields on the 11 bonds of 3.10%, 3.15%, 3.20%, 3.25%, 3.30%, 3.30%, 3.35%, 3.40%, 3.40%, 3.45% and 3.40%. Adding them gives 3.10 + 3.15 = 6.25, then 9.45, 12.70, 16.00, 19.30, 22.65, 26.05, 29.45, 32.90 and finally 36.30. Dividing 36.30 by 11 gives an index level of 3.30%. A city with a slightly weaker credit rating expecting to pay 0.35 percentage points over the index would budget a yield of 3.30% + 0.35% = 3.65%, and on a $40,000,000 issue that is annual interest of 3.65% of $40,000,000, which is $1,460,000.Case study
Seen in the real world.
Port Alderney is an invented municipality used for this illustrative case study. It needed $25,000,000 for a water treatment upgrade and its underwriter proposed pricing the bonds at a yield 0.90 percentage points above the Bond Buyer 11 level.
The finance director checked the index history and the spreads achieved by three comparable issuers with similar credit ratings, all of which had priced between 0.40 and 0.55 percentage points over the index. Armed with that evidence she pushed back and the issue eventually priced at 0.50 percentage points over.
In this fictional example the 0.40 percentage point improvement was worth $100,000 of interest a year on the $25,000,000 raised, and roughly $2,000,000 over a 20-year life. The work that produced the saving was simply knowing the index and what similar borrowers had paid against it.
Watch out
Common mistakes.
- Reading a fall in the index as bad news, when a lower yield index means borrowing has got cheaper and existing bond prices have gone up.
- Treating the index as the rate your own issue will achieve, when your credit rating, maturity and size all move the actual pricing.
- Confusing the 11-bond and 20-bond indices in a comparison, since the 11 covers higher-rated issuers and will normally show a lower yield.
Questions
People also ask.
How is the index calculated?
It is the straight average of the yields on 11 selected long-dated general obligation municipal bonds, each from a different issuer.
Can I invest in the index?
No, it is a published indicator rather than a tradeable instrument, though it is widely used as a reference for pricing and performance discussion.
Why does it move?
Mainly with general interest rate levels and with investor appetite for municipal credit, so both monetary conditions and local market demand show up in the series.
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