What is a Municipal Bond Index?

A municipal bond index is essentially a compilation of a number of municipal bonds and their current values or prices. Like any other kind of index, the municipal bond index typically includes previous price information in a line graph form, showing how values have fluctuated in the past. Putting all of the relevant municipal bonds together shows a kind of “average” movement and performance.

Municipal bonds are bonds that are issued by a municipality, such as a town, city, county, or other local government. Many tend to think of municipal bonds as issued by cities, which are generally more “visible” municipalities with large budgets. A municipal bond can be from any municipality, however.

When a municipality engages debt, that party can issue a bond. The bond offers others the opportunity to invest in the municipal debt. Further, municipal bonds can be refinanced and packaged into various types of funds, so that the yield from the bonds is delivered to individual investors.

Traders and analysts use municipal bonds to evaluate the performance of the bond market in general, or of one single municipal bond against the greater set of bonds involved in the index. This can be a good way to “do homework” on a bond investment. Experts are also recommending that investors look at the big picture of a municipal bond or “muni bond” before making it part of a portfolio.

In past eras, financial professionals tended to think of municipal bonds as one of the safest parts of the greater market. The idea was that a municipal bond would not “default” because municipalities always covered their risks. The idea of stable tax revenues also contributed to this way of thinking.

More recently, state governors and other public officials have come forward with troubling news about state and local budgets. Some municipalities have defaulted on municipal bonds. The “muni bond” market seems to still be highly rated by ratings agencies, but some professionals are hinting that the municipal bond may not be the “lock-box” that it previously had been for pension funds and other investments.

A municipal bond index will show how the bond market is responding to any current events, related to either the local economy, or the greater national or global financial realities. Using a municipal bond index will be a strategic way to try to predict value changes for those who have significant money invested in “muni bonds.” As with any investment, diversification, equity tracking, and good fund research will help a single investor stay afloat in various volatility events.