Investors in Municipal Bonds have a powerful new tool in their portfolio analysis arsenal. BondView, LLC, a leading provider of Municipal bond portfolio analysis and market data, has launched the BondView Stress Test. The stress test lets investors see at a glance how muni bond values are impacted by rising interest rates and other market conditions. The introduction of this free calculator is timely, given the increasing popularity of municipal bonds, and the expected interest rate increases following historic lows during the recession.
The BondView Stress Test is the latest in a suite of free research and analysis services provided at Bondview.com. “With baby-boomers retiring and tax rates going up, bonds are an increasingly attractive option. But information about muni bond investments has been murky” said Robert Kane, CEO. By offering the Stress Test tool, Bondview hopes to educate users about the correlation between interest rates and municipal bonds.
BondView’s research shows that at today’s prevailing market rates, a 550-basis-point interest rate shock could cause a 30-year, highly rated muni bond to lose about 40 percent in value. Investors need to know that even a 100 basis-point increase can have a significant effect.
Approximately 70 percent of muni bonds are owned by retail investors directly and thru funds within investor’s multiple brokerage accounts. But financial advisors want to monitor their clients’ complete muni bond holdings across several brokerage accounts. Bondview offers centralized monitoring and a complete analysis toolkit that now includes stress testing. This toolkit is for anyone with municipal bonds in their portfolio — not just institutional investors. Kane said “Investors need to know that rising interest rates will significantly erode muni bond values.”
Steve McLaughlin, managing director of the research and advisory firm Municipal Market Advisors, agrees. “You have investors out there who are reaching for yield, who don’t fully understand the risk with intermediate- to long-term bonds. And it doesn’t take a huge increase in rates for some potential losses to occur.”
Kane commented “The mantra of buy-and-hold investors has been to not worry about bond value changes and instead focus on holding till maturity. But rising rates and inflation will make these same investors feel poorer on paper, as the reverse wealth effect kicks in.”
BondView’s free online Stress Test calculator is easy to use and provides instant, insightful results. Stress testing enables investors to evaluate the effect of rising (or falling) interest rates on the prices of the approximately 50,000 active state and local bond issuers, as represented by 1.3 million bond cusips across the entire $2.9 trillion municipal bond market.
To use the Stress Test calculator, simply load up a bond and move the slider right or left to reflect increasing or decreasing interest rates. The change in estimated bond price is calculated instantly. Users can vary the interest rate up or down in 50-basis-point increments, through a total range of +/- 550 basis points. It can be used to calculate the resulting price change in a single municipal bond, or an entire bond portfolio, given the current price, coupon rate and maturity.
BondView’s stress test calculator employs two well-established financial principles to calculate bond price changes relative to interest rates: modified duration and convexity. The time it takes an investor to be repaid from the bond’s cash flows is known as duration. Modified duration uses duration to calculate a bond’s price change based on the change in yield, maturity and current price. Convexity is a measure of the curvature (non-linear) relationship of a bond’s price change to yield changes. The price decrease is not directly proportional to the change in yield, as is the case using modified duration. To account for this, the BondView Stress Test adds a convexity correction to the modified duration.
About BondView.com
Bondivew provides free municipal bond portfolio analysis and market data for investors and professionals. Our mission is to promote independent and informed decision making by municipal bond investors and their advisors. BondView.com provides high level monitoring and detailed quantitative analysis of one bond or an entire bond portfolio, no matter where it is housed. BondView is completely independent and dedicated to providing timely, accurate, real-world market data for individual municipal bonds and funds. Its suite of tools and services continues to evolve. The Bondview Stress Test is available now at http://www.bondview.com/stresstest/bond/.
Muni Investors Looking Good in Vallejo, CA
Saturday, May 28th, 2011Vallejo, California, the biggest U.S. city in bankruptcy, won court permission to send its exit plan to creditors, its municipal bondholders for a vote after retired workers dropped their objections. In summary, “The plan doesn’t alter securities tied to designated revenue sources, such as about $175 million in water revenue bonds, and other special tax obligations secured by special revenue of the city’s restricted funds, according to the documents. ”
U.S. Bankruptcy Judge Michael S. McManus in Sacramento, California, approved a disclosure statement for the plan in an order. McManus will take creditors’ votes into account when he decides whether to approve the plan at a hearing to be scheduled in the coming weeks. A hearing on the disclosure statement had been set for today. The retirees, represented by a court-sanctioned committee, were the last major objectors to the plan, which would cut labor costs and stretch out payments to other creditors.“The committee was concerned if the bankruptcy dragged on, their actual pensions might be jeopardized,’’ R. Dale Ginter, an attorney for the committee, said in a May 23 interview. During the bankruptcy, the city succeeded in cutting costs by firing employees, renegotiating union contracts and reducing what it pays to subsidize retiree health care. Vallejo, a onetime U.S. Navy town of about 120,000 on San Francisco Bay, sought protection from creditors in May 2008 under Chapter 9 of the U.S. Bankruptcy Code, after the recession eroded tax revenue and unions rejected wage cuts. Chapter 9 allows municipalities to reorganize debt rather than liquidate. The plan doesn’t alter securities tied to designated revenue sources, such as about $175 million in water revenue bonds, and other special tax obligations secured by special revenue of the city’s restricted funds, according to the documents. The case is In re City of Vallejo, 08-26813, U.S. Bankruptcy Court, Eastern District of California (Sacramento).” Source: Today’s (5-27-11) Bloomberg Municipal Market Brief.
Another great American tradition is found in the millions of decisions that pass through and from our court system. We are a nation of law. We have a system that respects contracts. It carries with it the notion that obligations that are undertaken are to be fulfilled in economic terms if they are reasonable.
Vallejo’s municipal bankruptcy occurred because the politicians who ran the city ignored these fundamental values and obligated the city taxpayers to unreasonable burdens. Now the court is throwing these excessively costly burdens out. After $10 million of litigation, we are getting to some resolution. Meanwhile, please note the highlighted portion of this news report. It states that the payment stream for the essential-service revenue bond that funded the supply of water to the city is intact.
Many have emphasized importance of essential-service revenue and of the legal construction that protects these bond holders. Here is a prime example. The city is in bankruptcy, yet the bond holder is getting paid.
Reposted with permission from our friends at Cumberland Advisors.
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