Bond Buyer 11 (BB11): A Key Benchmark for Municipal Bond Market

The Bond Buyer 11 (BB11) is an important index that measures bond yields in the municipal bond market. It represents an average of yields from 11 carefully selected, high-rated, long-term municipal bonds. The BB11 is part of a larger index called the Bond Buyer 20 (BB20). While these indexes play a crucial role in the market, they face criticisms related to market weighting, index structure, and turnover. Despite these challenges, the BB11 remains a key benchmark for investors and traders in the municipal bond market.

Basics

The Bond Buyer 11 index stands as a pivotal financial measure within the municipal bond market. Published by The Bond Buyer, a renowned daily finance newspaper specializing in coverage of the municipal bond market, the BB11 is an estimated average of bond yields derived from 40 meticulously selected, high-rated, long-term municipal bonds.

BB11 Calculation and Bond Composition

The calculation of BB11 is rooted in the average yield of 11 chosen general obligation municipal bonds, each maturing over 20 years. These general obligation (GO) bonds obtain their financial sustenance for interest and principal payments from the financial reservoirs of state or local governments, guaranteeing their backing with the full faith and credit of the municipal government. In specific scenarios, the issuing municipal government possesses the authority to escalate taxes to meet its payment commitments regarding the GO bond.

The 11 bonds encompassed within the BB11 index are part of the larger Bond Buyer 20 (BB20) index, another significant index offered by The Bond Buyer. BB20 is a compilation of 20 general obligation municipal bonds maturing in 20 years, structured based on a survey of municipal bond traders rather than concrete prices or yields. As an estimated average of bond yields, BB20 plays a role in determining the interest rates for fresh issuances of general obligation bonds.

Notably, the average rating of the 11 bonds constituting the BB11 index is esteemed at Aa2 by Moody's and graded AA by Standard & Poor’s.

Range of Bond Buyer Indexes

The Bond Buyer boasts several indexes that significantly impact the municipal bond market. Apart from the BB11 and BB20, these include the Bond Buyer's Municipal Bond Index, the Revenue Bond Index, the SIFMA index, and the Municipal Market Data (MMD) Curve. These diverse indexes are closely monitored by investors and traders involved in the municipal bond market.

What Are Bond Indexes Criticized For?

Bond indexes, despite their significance, encounter inherent problems that prompt criticism.

Market Weighting

Most bond indexes operate on a market-weighted basis, which essentially hinges on the market value of the bonds. This mechanism means that companies with higher debt acquire a more substantial allocation in a corporate bond index. This allocation approach might not be advantageous, especially if a company accrues more debt. Moreover, numerous bonds experience infrequent trading, leading to wider spreads that complicate accurate pricing. To counter this, a bond index may comprise predominantly liquid bond issues with tighter spreads and more frequent trades.

Issues with Index Structure

A bond index containing too few bonds could result in the possibility of traders predicting a bond fund's actions, leading to front-running and potential profit manipulation. Therefore, a solution involves including a significant number of bonds to mitigate this risk. Additionally, most bond indexes exclude smaller bond issues to reduce problems associated with a lack of liquidity.

Turnover Concerns

As bonds reach maturity, they are naturally removed from an index, causing a constant turnover. This turnover generates changes in the characteristics of the added bonds compared to those removed, impacting critical index features like average bond maturity every year.

Conclusion

The Bond Buyer 11 serves as a vital benchmark in the realm of municipal bond yields, reflecting an estimated average of carefully selected, high-rated, long-term municipal bonds. Alongside other notable indexes published by The Bond Buyer, the BB11 stands as a focal point for investors and traders in the municipal bond market. However, criticisms persist regarding bond indexes, including issues related to market weighting, index structure, and turnover, presenting ongoing challenges and considerations for the market participants.