Key Takeaways
- Broad benchmark for U.S. investment-grade bonds.
- Market-cap weighted with about 13,000 bonds included.
- Includes Treasuries, corporates, MBS, ABS, and CMBS.
- Longer duration and rising credit risk recently.
What is Lehman Aggregate Bond Index?
The Lehman Aggregate Bond Index, now known as the Bloomberg U.S. Aggregate Bond Index, is a comprehensive benchmark tracking the performance of the U.S. investment-grade, fixed-rate taxable bond market. It encompasses U.S. Treasuries, government-related securities, corporate bonds, mortgage-backed securities, and asset-backed securities.
This index serves as a core standard for measuring bond market returns and risk, widely used by portfolio managers and investors seeking broad exposure to U.S. bonds.
Key Characteristics
Key features define the breadth and structure of the Lehman Aggregate Bond Index.
- Market Capitalization Weighting: Bonds are weighted by outstanding market value, making larger issuances more influential in the index.
- Diverse Composition: Includes mortgage-backed securities (MBS), U.S. Treasuries, corporate bonds, and securitized debt, with MBS historically comprising up to 41% of the index.
- Credit Quality: Primarily investment-grade bonds with a sizable portion rated AAA or BBB, reflecting moderate credit risk.
- Duration Profile: Effective duration typically ranges from 6 to 6.5 years, capturing interest rate sensitivity measured by metrics like Macaulay duration.
- Liquidity and Transparency: Maintained and calculated daily by Bloomberg, providing reliable data for benchmarking and analysis.
How It Works
The index aggregates thousands of bonds, weighting each by market value to reflect their relative size in the fixed income market. Bonds included must meet minimum maturity and credit criteria, ensuring the index focuses on investment-grade securities.
Investors cannot directly invest in the index but can gain exposure through ETFs and mutual funds such as the BND, which tracks this benchmark. The index updates daily reflecting market movements, coupon payments, and bond maturities, offering a dynamic gauge of the U.S. bond market’s health.
Examples and Use Cases
The Lehman Aggregate Bond Index is widely used for benchmarking, portfolio construction, and risk assessment in various sectors.
- Corporate Exposure: Investors in companies like BND or funds tracking the index benefit from diversified corporate bond holdings alongside government debt.
- Safe-Haven Assets: U.S. Treasuries within the index act as a safe-haven during market volatility, balancing risk in portfolios.
- ETF Selection: When choosing fixed income ETFs, consider guides such as best bond ETFs to find products tracking this index efficiently.
- Low-Cost Index Funds: The index underpins many low-cost index funds, appealing to investors seeking broad, cost-effective bond market exposure.
Important Considerations
While the Lehman Aggregate Bond Index offers broad market coverage, its rising exposure to BBB-rated bonds increases potential credit risk compared to previous AAA-heavy eras. You should be aware of interest rate sensitivity, as longer durations heighten volatility during rate changes.
Understanding characteristics like callable bonds within the index can help you evaluate prepayment risks, especially in mortgage-backed securities. Carefully assess these factors relative to your investment objectives before allocating to funds tracking this benchmark.
Final Words
The Bloomberg U.S. Aggregate Bond Index offers broad exposure to the U.S. investment-grade fixed income market, reflecting shifts in sector composition over time. Review your portfolio alignment with its evolving weightings, especially in corporates and Treasuries, to ensure your bond allocations meet your risk and income goals.
Frequently Asked Questions
The Lehman Aggregate Bond Index, now known as the Bloomberg U.S. Aggregate Bond Index, is a broad benchmark tracking the performance of U.S. investment-grade, USD-denominated, fixed-rate taxable bonds. It includes U.S. Treasuries, corporate bonds, mortgage-backed securities, and other government-related bonds.
The index includes a diverse mix of bonds such as U.S. Treasuries, government-related securities, corporate bonds, mortgage-backed securities (MBS), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS), all typically with at least one year to maturity and investment-grade credit ratings.
The index is market capitalization weighted, meaning bonds with larger outstanding market values have a bigger influence on the index's performance. It currently includes around 13,000 bonds totaling approximately $26.5 trillion in market value.
Since 2008, the share of mortgage-backed securities in the index has declined from about 41% to around 28%, while exposure to U.S. Treasuries and corporate bonds, especially BBB-rated corporates, has increased significantly due to large bond issuances and longer maturities.
The index has an effective duration of roughly 6 to 6.5 years, meaning it is sensitive to interest rate changes. With a growing portion of BBB-rated corporate bonds, the credit risk has increased compared to earlier periods dominated by higher-rated bonds.
Bloomberg Index Services Limited currently calculates, maintains, and tracks the index daily using market data from global sources. The index was originally launched by Lehman Brothers, later managed by Barclays, and now by Bloomberg.
It serves as a core benchmark for U.S. investment-grade bond market performance and is widely used for Total Return, Core, and Core Plus fixed income strategies, helping investors gauge market trends and build diversified bond portfolios.
