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Bond Buyer 11 (BB11) Definition

What Is the Bond Purchaser 11 (BB11)?

The Bond Purchaser 11 (BB11) index is a theoretical and estimated common of bond yields that’s printed by The Bond Buyer, a each day finance newspaper that covers the municipal bond market and tracks 40 highly-rated, long-term municipal bonds. The Bond Purchaser publishes the BB11 to be used as a benchmark in monitoring municipal bond yields.

There are tons of of market indexes. Generally, a market index is a hypothetical portfolio of funding holdings that represents a section of the financial market. The calculation of the index worth comes from the costs of the underlying holdings. Some market indexes concentrate on the whole inventory or bond market. Others concentrate on a particular sector throughout the market, equivalent to expertise. 

Key Takeaways

  • The Bond Purchaser 11 (BB11) index is a theoretical and estimated common of bond yields that’s printed by The Bond Purchaser.
  • The Bond Purchaser is a each day finance newspaper that covers the municipal bond market and tracks 40 highly-rated, long-term municipal bonds.
  • The Bond Purchaser publishes the BB11 to be used as a benchmark in monitoring municipal bond yields.
  • The calculation of the BB11 is from the typical yield of 11 chosen common obligation municipal bonds maturing in 20 years.

Understanding the Bond Purchaser 11

The calculation of the BB11 is from the typical yield of 11 chosen common obligation municipal bonds maturing in 20 years. General obligation (GO) bonds are municipal bonds which have their curiosity and principal fee obligations funded from the state or native authorities’s monetary coffers. They’re backed by the complete religion and credit score of the municipal authorities. In some instances, the issuing municipal authorities has the authority to extend taxes to be able to fulfill its fee obligations on the GO bond.

The BB11 consists of 11 of the 20 bonds within the Bond Buyer 20 (BB20). BB20 is one other one in every of The Bond Purchaser’s indexes. It’s based mostly on a portfolio of 20 common obligation municipal bonds that mature in 20 years. The BB20 index relies on a survey of municipal bond merchants, somewhat than precise costs or yields. As a theoretical and estimated common of bond yields, the BB20 is used to find out the rates of interest for a brand new difficulty of general obligation bonds

The typical score of the 11 bonds that make up the BB11 index is Aa2 (as rated by Moody’s) and grade AA (as rated by Standard & Poor’s).

There are a lot of indexes printed by The Bond Purchaser, along with the BB11 and the BB20. All of those indexes are broadly watched by buyers and merchants within the municipal bond market. Different indexes embody the Bond Purchaser’s Municipal Bond Index, the Income Bond Index, the SIFMA index, and the Municipal Market Information (MMD) Curve.

Criticisms of Bond Indexes

Some potential issues are inherent in bond indexes. Most bond indexes are market-weighted, which means their foundation is available on the market worth of the bonds. So, firms with extra debt have the next allocation in a company bond index. 

It will not be useful to carry extra of an organization’s debt because it borrows extra. Additionally, many bonds don’t continuously commerce so that they have broad spreads. Huge spreads make it troublesome to cost these bonds as a result of they might not have traded in weeks. Any methodology to calculate the worth would generate an estimate, which will not be near the precise value of the subsequent commerce. To remove this drawback, a bond index could also be structured to incorporate solely extra liquid, or largely liquid bond, points with tight spreads which have frequent trades. 

Nevertheless, if the index consists of too few bonds, it might create one other drawback. Merchants could possibly front-run a smaller index by anticipating which bonds a bond fund would purchase and promote. This front-running might allow the merchants to generate low-risk revenue on the expense of the fund consumers and sellers. The answer is to incorporate a extra vital variety of bonds (that is true for a lot of indexes). Additionally, most bond indexes don’t embody smaller bond points to reduce the issues related to a scarcity of liquidity.

One other difficulty is when a bond reaches maturity, it ceases to exist. Due to this, there’s a pure turnover constructed into each bond index. Nevertheless, the traits of the bonds added could differ from the traits of these faraway from the index. Consequently, important options of a bond index, equivalent to the typical maturity of bonds within the index, can change yearly.

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