Evaluating Risk in Government Bond Portfolios

The $2.9 trillion municipal bond market, comprised of legions of analysts, rating agencies, bond counsel, investment funds and investors, is sending a loud and clear message to investors: you’re on your own when determining which bond issuers hold the least risk. To answer that challenge, analytical software firm Lumesis offers bond investors Demographic Information Visualization for Economic Research (DIVER), a proprietary credit analytical tool designed to measure the underlying credit-worthiness of municipalities.

DIVER, an interactive, web-based application, visually presents demographic, economic, financial and other data through heat maps and dashboards to help users understand local and regional risks, thereby allowing them to plot their exposures against that risk. Full disclosure may still elude analysts and investors for many years since DIVER will focus on demographics rather than financials. But users will gain a lot more transparency, which is not hard to do given the opaque place where they're starting.

Recent reports of state and local governments struggling to pay their obligations have many investors worried about the risks of municipal bonds, long viewed as a safe and predicable investment. Credit-rating agencyStandard & Poor’s reportsthat downgrades of bonds issued by municipalities could increase in 2011.

Still, many muni analysts insist that defaults are exceptions exploited by the popular press, even as the public flees the market despite rising interest rates. More than $13 billion was withdrawn from mutual and exchange traded municipal bond funds in the last two months of 2010.

“We've focused in on how to be better predictors, how to get a step ahead of the next event,” says Gregg Bienstock, principal at Lumesis and DIVER co-founder who joined Timothy J. Stevens, Joshua Laurito and Kate McDonough to launch the tool in September of 2010. “Senior management and boards of institutional investors have a responsibility to ensure that total assessments of credit and other risk associated with their investments are being made and do not mechanistically rely on CRA ratings,” states Bienstock in hiscommentary, “The Growing Crisis in the Municipal Bond Market: Do Analysts and Investors Have the Right Mindset and Tools to Handle It?”

Lumesis has six clients and a dozen users who Bienstock describes as in the wealth management market, who are trial testing DIVER now. Annual license fees start at $12,000 a year/per user for internal purposes.

Daniel Berger, senior market strategist for Thomson Reuters’ Municipal Market Data team, has seen DIVER work, with its 57,000 government issuers in heat maps on which users can overlay portfolio holdings. “I introduced Diver to the MMD [Municipal Market Data] team,” says Berger, who has had posts with Citigroup, UBS and the MBIA (Municipal Bond Investors Assurance Corporation). “I think it's a terrific use of technology. We may be doing a partnership with it.”

According to Berger, DIVER would gain from Thomson Reuters’ bond pricing expertise. Collaboration “would be very useful for our clients,” he says. Municipal Market Data has a subscriber base of 2,500 municipal bond traders, market participants, including large government issuers.

“这是一个2.9万亿美元的市场,在范围和多样化credit quality — a very decentralized marketplace,” says Berger, who envisions Lumesis adding news and other relevant data to a particular community as DIVER matures. “The DIVER tool will greatly help those with large portfolios who want a more organized fashion in which to manage them. It’s in the preliminary stages with them, but we think there are endless possibilities.”