Bond indices don’t accurately gauge markets

There’s quite a difference between equity and bond indices.

So says Patrick Bradley, product specialist with the global fixed-income team at Brandywine Global Investment Management in Philadelphia. He co-manages the Renaissance Optimal Income Portfolio.

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Like equity indices, they offer snapshots of their associated bond markets; an example is the Citigroup World Government Bond Index (WGBI), which comprises sovereign government bonds of investment-grade-rated companies.

But Bradley warns many investors don’t like bond index data since they don’t accurately gauge the overall bond market.

“If a company accounts for a large component of an equity index, then it has significant market capitalization,” he says, and investors are often attracted to the company as a result.

But, “If you’re a large component of a bond index, all that means is you issue a lot of debt. And that’s not a reason to invest in a particular country.”

For example, Japanese yen-denominated bonds are roughly 32% of the WGBI—denominated in Canadian dollars. But clients would need to ask themselves if they wanted to own Japan simply because it’s such a large component of an index.

“There are better opportunities in the market,” says Bradley, so he doesn’t invest in accordance with bond indices.

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Additionally, there are also a large number of securities in bond market indices—the Citigroup WGBI has over 900. To complicate matters, “different issues present you with differing maturities and durations” even if they have the same issuers.

For this reason, bond indices are seen as “moving target[s] that change over time” rather than as reliable, stable gauges of market performance.

While equity indexes offer more accurate glimpses of markets, bond indexes are flawed and shouldn’t be relied upon, concludes Bradley.

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