Chart: The bond benchmark and diversification

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The latest #chartonthego takes a closer look at how the bond benchmark poses a challenge for diversification.

Chart: The bond benchmark and diversification

 

  • The 2008 financial crisis and subsequent government intervention changed the complexion of the U.S. bond market. In 2007, U.S. Treasuries comprised 22% of the Bloomberg Barclays U.S. Aggregate Bond Index (the Agg) — that’s increased to 39% today. Factoring in debt issued by government agencies and mortgage-backed securities (MBS), the total government exposure in the Agg is now over 70%.

 

  • The bond benchmark makes diversification a challenge. The index weightings do not foster diversification. The correlation of the top two components, U.S. Treasuries and MBS, is 83% with minimal exposure to those components with low cross-correlations.

 

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