Indexes to Track the Performance of Bond Markets
Investors use market indexes as benchmarks by which to evaluate the professional management of a mutual fund, to watch particular markets as a whole, and to build portfolios or track the ongoing performance of an existing portfolio. Among the most commonly cited bond benchmarks used by U.S. investors are the Barclays Capital family of indexes, which monitors municipal, government and corporate groups of bonds with varying maturities.
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History
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Indexes used to track the performance of the stock market have been around for decades -- think Dow Jones Industrial Average and Standard & Poor's 500. Conversely, the use of indicators to track the performance of bonds and bond markets did not become widespread until the mid-1980s. From December 1984 to January 1987, four major investment firms -- Lehman Brothers, Merrill Lynch, J.P. Morgan and Salomon Brothers -- made available to investors security-market indicator series that included indexes that would track the performance of global government bonds. Since that time, various indexes tracking specific types of bonds, as well as bonds from limited geographic regions have come into widespread use.
Major U.S. Index
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Until Barclays Capital renamed the major index in 2008, Lehman Brothers Aggregate Index was the benchmark used to track the bond market as a whole within the United States. In older financial literature, as well as in current casual references, the index is still referred to as Lehman Brothers. Officially branded the Barclays Capital U.S. Aggregate Bond Index, this index is the standard by which bonds and bond index funds in the U.S. are measured in 2011.
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Global Indexes
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From a global perspective, the J.P. Morgan Global Government Bond Index and the Citigroup World Government Bond Index, formerly Salomon Smith Barney, are two common benchmarks used to analyze and evaluate the performance of bonds issued by foreign governments. Included in the J.P. Morgan index, readjusted monthly, are the aggregate bond issues from the governments of Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, The Netherlands, Spain, Sweden, the United Kingdom and the United States.
Tracking Foreign Countries
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Indexes tracking the bond issues of specific countries are also readily available for the more well-established sovereign governments. For example, the Barclays Capital Global Aggregate Japan Government Float Adjusted Bond Index tracks investment-grade Japanese government-related bond issues with maturities of more than one year.
Considerations
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Tracking a group of bonds is a bit more complicated than tracking stocks due to the number of variables among bond issues. Bonds within the group may change consistently as individual issues mature, are called by the issuer or converted to common stock. Furthermore, in tracking investment-grade issues on a global scale, the countries included within the index may change periodically. Prudent investors must remain aware of the changing components of a particular bond index to evaluate the assets properly.
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References
- Federated: Investor Education-Benchmark Index Glossary
- "Investment Analysis and Portfolio Management"; Fifth Edition; Frank K. Reilly and Keith C. Brown; 1997
- Raymond James: Investing in Convertible Securities
- Reuters; Update 1-Lehman Bond Index Name Change Marks End of Era; Richard Leong; November 2008
- Standard & Poor's: Financial Library-Glossary of Terms
- Vanguard: Vanguard Funds Tracking Barclays Capital's Indexes
