What is 'Bond Buyer 11'

The Bond Buyer 11 (BB11) index is a theoretical and estimated average of bond yields. The Bond Buyer publishes the BB11 for use as a benchmark in tracking municipal bond yields.

There are hundreds of market indexes. Some focus on the entire stock or bond market. Others some focus on a sector within the market such as technology. 

BREAKING DOWN 'Bond Buyer 11'

The calculation of the BB11 is from the average yield of 11 selected general obligation municipal bonds maturing in 20 years. It is composed of 11 of the 20 bonds in the Bond Buyer 20 (BB20). The average rating of the 11 bonds that make up the index is rated Aa2 by Moody's or grade AA by Standard & Poor’s. The Bond Buyer also has a BB40 index composed of 40 bonds.

Problems with Bond Indexes

There are potential problems inherent in bond indexes. Most bond indexes are market weighted, meaning their basis is on the market value of the bonds. So, companies with more debt have a higher allocation in a corporate bond index. 

It may not be beneficial to hold more of a company’s debt as it borrows more. Also, many bonds don’t frequently trade so have wide spreads. Wide spreads make it difficult to price such bonds as they may not have traded in weeks. Any method to calculate the price would generate an estimate, which may not be close to the actual price of the next trade. To eliminate this problem, a bond index may be structured to include only more liquid, or mostly liquid bond, issues with tight spreads that have frequent trades. 

However, if the index consists of too few bonds, it can create another problem. Traders may be able to front-run a smaller index by anticipating which bonds a bond fund would buy and sell. This front-running could enable the traders to generate low-risk profit at the expense of the fund buyers and sellers. The solution is to include a more significant number of bonds, as do many indexes. Also, most bond indexes don’t include smaller bond issues to minimize the problems associated with a lack of liquidity.

Another issue is when a bond reaches maturity, it ceases to exist. Because of this, there is a natural turnover built into every bond index. However, the characteristics of the bonds added may differ from the characteristics of those removed from the index. As a result, essential features of a bond index, such as the average maturity of bonds in the index, can change every year.

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