The Bloomberg Global Aggregate Bond Index: the premier choice?

The Bloomberg Global Aggregate Bond Index (Global Agg) is unmatched in its scale and diversity. Here, in the first of a three part series, Insight Investment⁴ detail the structure of the Bloomberg Global Aggregate Bond Index.

Unmatched depth and breadth

The Global Agg is a high quality, broadly diversified, multi-currency universe, which provides investors with an extensive range of opportunities to capture value. Its scale is vast, encompassing more than 30,000 securities from more than 3,100 issuers and with a market capitalisation of over $50 trillion⁵.

Government and government-related bonds typically offer more safety through economic downturns, as well as potential for capital gains if yields fall due to a flight-to-quality.

Meanwhile, corporate credit may provide greater potential positive excess returns if spreads tighten, often when economic outlooks improve, and corporate sectors face more favourable prospects.
 

Navigating the dip: higher yields create a more positive outlook

In recent years, the Global Agg has faced challenges, underperforming relative to Swiss bonds on a hedged basis, and to an even larger degree on an unhedged basis (see Figure 2). This underperformance can be attributed to various factors, including differing economic conditions and monetary policies between global markets and Switzerland. The strong performance of the Swiss franc, even against the US dollar, has been critical for those investing on an unhedged basis. However, this divergence in performance has also created an opportunity for investors who are prepared to revisit the index.

The yield on the Bloomberg Global Aggregate Bond Index has risen significantly over recent years, presenting a more favourable outlook. Higher yields mean that investors have the potential to achieve better returns on their investments compared to the past, especially if yields decline in future and generate capital gains. 

At the same time, Swiss bonds have experienced a multi-year bull market, with the yield of the Bloomberg Swiss Aggregate Index not far from the lows seen during the 2019 pandemic. This is likely to limit the potential for future gains. 
 

Index returns are just a starting point

The analysis from the Mercer GMDB, one of the most comprehensive database for institutional investors,  shows that although equity funds generally underperform their passive counterparts, the story can be very different in fixed income. 

In fact, the Bloomberg Global Aggregate Index has historically generated long-term returns well below their active constituents, often even placed in the 4th quartile of the whole universe. 

In Insight’s view, the ability for active managers to add value in fixed income is a function of the structural inefficiencies that can be found within fixed income indices, and we will explore this topic in the next article in this series.