New Tool For Municipal Bonds Could Shock Investors
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/.