https://www.americancityandcounty.com/wp-content/themes/acc_child/assets/images/logo/footer-logo.png
  • Home
  • Co-op Solutions
  • Hybrid Work
  • Commentaries
  • News
  • In-Depth
  • Multimedia
    • Back
    • Podcast
  • Resources & Events
    • Back
    • Resources
    • Webinars
    • White Papers
    • IWCE 2022
    • How to Contribute
    • Municipal Cost Index – Archive
    • Equipment Watch Page
    • American City & County Awards
  • About Us
    • Back
    • About Us
    • Contact Us
    • Advertise
    • Privacy Statement
    • Terms of Service
American City and County
  • NEWSLETTER
  • Home
  • Co-op Solutions
  • Hybrid Work
  • Commentaries
  • News
  • In-Depth
  • Multimedia
    • Back
    • Podcasts
  • Resources/Events
    • Back
    • Webinars
    • White Papers/eBooks
    • IWCE 2022
    • How to Contribute
    • American City & County Awards
    • Municipal Cost Index
    • Equipment Watch Page
  • About Us
    • Back
    • About Us
    • Contact Us
    • Advertise
    • Cookie Policy
    • Privacy Stament
    • Terms of Service
  • newsletter
  • Administration
  • Economy & Finance
  • Procurement
  • Public Safety
  • Public Works & Utilities
  • Smart Cities & Technology
  • Magazine
acc.com


Taking the fear out of bonds

Taking the fear out of bonds

The recent rash of cities and counties falling-victim to bond market disasters has prompted widespread consideration of the appropriateness of bonds in
  • Written by Smith, Gary
  • 1st April 1995

The recent rash of cities and counties falling-victim to bond market disasters has prompted widespread consideration of the appropriateness of bonds in municipal portfolios.

After the hit that derivatives took in 1994, public trustees are shying away from some speculative instruments. But investments in agencies, mortgage-backed instruments or collateralized mortgage obligations CMOS) are still viable as long as the trustee is knowledgeable about such securities and as long as the instruments can be cashed quickly, regardless of market conditions.

Most federal agency securities, mortgage backs and CMOs have at least some complicated features, and, for most investors, the problem with owning complicated bonds is the difficulty in establishing their status at any given time.

Bonds can be called from the owner, the coupon can change or both. Bond players refer to these “wrinkles” as options, but they are the agency’s options rather than the buyer’s. For example, it is the agency’s right to call the bond or to let the buyer continue to carry the market risk of ownership.

The Federal Home Loan Bank, the Federal Home Loan Mortgage Company and the Federal National Mortgage Association are examples of savvy borrowers; any option that could work to the investor’s benefit will be exercised against the investor. To compensate for these options and the risks they present to the buyer, non-treasury bonds carry higher yields than treasuries.

To determine adequate compensation for callable bonds, option-adjusted spread analysis should be performed. Virtually all bond dealers and dealer banks have access to the financials on which this analysis is based.

The basics are as follows. Assuming that a bond is callable at par (many issues are) and that interest rates fall, the investor loses virtually all of the bond’s upside appreciation above par. In exchange for the loss of upside price appreciation, a higher coupon is paid. The goal of the option-adjusted analysis is to measure whether the new coupon r presents adequate compensation for (1) the loss of appreciation and (2) the loss of an income stream if the bond is called.

Trustees also should be able to check the adequacy of non-treasury compensation by comparing it to current treasury yields. The Wall Street Journal’s daily “Treasury Bonds, Notes and Bills” section is perhaps the most convenient reference for such comparisons and is routinely reprinted in local newspapers.

With some homework and attention, the purchase of non-treasury bonds does not have to be unduly risky. In addition to compensation research, “stress testing” yield, price and rate changes for severe interest rate fluctuations prior to investment will reduce the probability of an unexpected outcome.

Trustees can further boost security by consulting at least three legitimate sources — for example, a bank and two dealers — during the decision-making process. These sources should be willing to speak honestly and compare investments without imposing an obligation to invest with them.

A thorough understanding of any investment is critical in determining its appropriateness for a portfolio, and trustees must be willing to ask questions and demand answers. Following a recent valuation of Maryville, Mo.’s, investment portfolio, Maury Bouas a member of the city’s Securities Advisory Committee, said, “We were confident that we had a thorough understanding of our position and had developed an intelligent plan for disposing of inappropriate investments.”

Tags:

Most Recent


  • Taking the fear out of bonds
    Take American City & County's budgeting survey
    With the recently passed infrastructure-related legislation by the federal government, local administrators across the United States are poised to make historic investments into their communities.  Given the generational precedence of this action, we’re curious about the state of local budgets—what expense lines are increasing the fastest year-over-year? In what area has federal funding been the […]
  • Atlanta, Ga.
    Six cities and counties will take stock of underutilized assets in Rethinking Revenue incubator
    The Government Finance Officers Association in collaboration with various organizations including Urban3 and the Sorenson Impact Center has been spearheading a forward-looking approach to public financing, the Rethinking Revenue Project, an investigation of the foundational structure of government revenue and underutilized assets, for about a year now. A new initiative launched by the collaboration is […]
  • Seamless Cooperative Experience Saves Indiana City Exponentially in Time and Money
    Significant new responsibility in an unfamiliar spend category didn’t intimidate Jasper-Dubois County Public Library Director, Christine Golden. What could’ve been an overwhelming furniture project for a state-of-the-art, 67,000 square-foot new facility turned into a seamless, stress-free experience through a cooperative purchasing strategy. “Stress-free” may sound like an exaggeration, but it’s the result that cooperative purchasing […]
  • 10 best large cities for fishing
    Across the United States, Americans of all backgrounds—from both urban and rural settings alike—enjoy a mutual pastime: fishing. But while there are plenty of cities that feature lakes and rivers, some large metro areas are better fishing communities than others.  A list created by Apartment Guide considers all U.S. cities with a population of more […]

Leave a comment Cancel reply

-or-

Log in with your American City and County account

Alternatively, post a comment by completing the form below:

Your email address will not be published. Required fields are marked *

Related Content

  • How governments can keep employees safe as they return to work
  • Lessons from your friendly neighborhood public service employees
  • North Texas alliance partners with Marketplace.city on smart government solutions
  • Harris County deploys next-generation security in 150 public buildings

White papers


How to Assemble a Rockstar Website Redesign Steering Committee

7th June 2022

Hand Hygiene: Compliance Matters

23rd May 2022

What it Takes to Build a Winning Esports Program

23rd May 2022
view all

Events


PODCAST


Young Leaders Episode 4 – Cyril Jefferson – City Councilman, High Point, North Carolina

13th October 2020

Young Leaders Episode 3 – Shannon Hardin – City Council President, Columbus, Ohio

27th July 2020

Young Leaders Episode 2 – Christian Williams – Development Services Planner, Goodyear, Ariz.

1st July 2020
view all

Twitter


AmerCityCounty

Take American City & County’s budgeting survey dlvr.it/ST0qQP

28th June 2022
AmerCityCounty

Six cities and counties will take stock of underutilized assets in Rethinking Revenue incubator dlvr.it/ST0ZVp

28th June 2022
AmerCityCounty

Seamless Cooperative Experience Saves Indiana City Exponentially in Time and Money dlvr.it/SSxp95

27th June 2022
AmerCityCounty

10 best large cities for fishing dlvr.it/SSxbSZ

27th June 2022
AmerCityCounty

Generational differences present an opportunity to reinvent public sector service delivery dlvr.it/SSxbN7

27th June 2022
AmerCityCounty

Report: Local and state governments are facing a retention crisis; the worst could be yet to come dlvr.it/SSnmS7

24th June 2022
AmerCityCounty

Amid an unprecedented increase in federal spending, cities and counties stand to benefit from partnerships dlvr.it/SSkGBn

23rd June 2022
AmerCityCounty

Governments using technology to harness data and improve decision-making dlvr.it/SSk3H0

23rd June 2022

Newsletters

Sign up for American City & County’s newsletters to receive regular news and information updates about local governments.

Resale Insights Dashboard

The Resale Insights Dashboard provides model-level data for the entire used equipment market to help you save time and money.

Municipal Cost Index

Updated monthly since 1978, our exclusive Municipal Cost Index shows the effects of inflation on the cost of providing municipal services

Media Kit and Advertising

Want to reach our digital audience? Learn more here.

DISCOVER MORE FROM INFORMA TECH

  • IWCE’s Urgent Communications
  • IWCE Expo

WORKING WITH US

  • About Us
  • Contact Us

FOLLOW American City and County ON SOCIAL

  • Privacy
  • CCPA: “Do Not Sell My Data”
  • Cookies Policy
  • Terms
Copyright © 2022 Informa PLC. Informa PLC is registered in England and Wales with company number 8860726 whose registered and Head office is 5 Howick Place, London, SW1P 1WG.
This website uses cookies, including third party ones, to allow for analysis of how people use our website in order to improve your experience and our services. By continuing to use our website, you agree to the use of such cookies. Click here for more information on our Cookie Policy and Privacy Policy.
X