What Is the Lehman Aggregate Bond Index?
The Lehman Aggregate Bond Index was a widely recognized benchmark in the realm of fixed income investment benchmarking, serving as a comprehensive measure of the U.S. investment-grade bond market. It provided a broad representation of diverse bond types, including U.S. Treasuries, government agency bonds, corporate bonds, and securitized products like mortgage-backed securities (MBS) and asset-backed securities (ABS). As a market capitalization-weighted index, its components were weighted based on the outstanding market value of each bond, reflecting the overall size and liquidity of different segments of the bond market. The Lehman Aggregate Bond Index was a crucial tool for institutional investors, portfolio managers, and analysts to gauge the performance and characteristics of the broad U.S. taxable bond market.
History and Origin
The origins of the Lehman Aggregate Bond Index trace back to 1973 when Lehman Brothers first began publishing bond benchmarks. For decades, it served as a foundational index for fixed income investors, becoming a standard against which the performance of numerous bond portfolios was measured. However, the legacy of the Lehman Aggregate Bond Index took a significant turn with the bankruptcy of Lehman Brothers in September 2008, a pivotal moment in the global financial crisis caused, in part, by the subprime mortgage crisis.
Following Lehman Brothers' collapse, Barclays PLC acquired a significant portion of Lehman's North American operations, including its highly regarded index business. In November 2008, Barclays rebranded the Lehman bond benchmarks as the Barclays Capital Aggregate Bond Index, integrating them with its existing index offerings6. This acquisition allowed the methodologies and staff behind the indexes to be largely retained, ensuring continuity for the investment community that relied on these benchmarks5. Years later, in December 2015, Bloomberg LP announced its agreement to acquire Barclays' risk analytics and index solutions business, which included the former Lehman benchmarks4. The transaction was completed in mid-2016, leading to another rebranding. The index was subsequently named the Bloomberg Barclays US Aggregate Bond Index and, as of August 2021, is known simply as the Bloomberg US Aggregate Bond Index.
Key Takeaways
- The Lehman Aggregate Bond Index was a comprehensive benchmark for the U.S. investment-grade fixed income market.
- It included U.S. Treasuries, government agency bonds, corporate bonds, mortgage-backed securities, and asset-backed securities.
- The index was market capitalization-weighted, meaning larger bond issues had a greater influence on its performance.
- Its lineage continues through the current Bloomberg US Aggregate Bond Index, which maintains similar methodologies.
- It served as a critical tool for assessing the performance of bond portfolios and understanding broad market trends.
Interpreting the Lehman Aggregate Bond Index
Interpreting the Lehman Aggregate Bond Index, or its subsequent iterations, primarily involves understanding its role as a proxy for the broader U.S. investment-grade bond market. Changes in the index's value indicated the overall performance of this market segment. A rising index suggested positive returns for bonds, often due to falling interest rates, which increase bond prices, or strong investor demand. Conversely, a falling index could signal a downturn, perhaps due to rising interest rates or concerns about credit risk among the underlying issuers.
Portfolio managers used the Lehman Aggregate Bond Index to assess the performance of their bond allocations relative to the market. For instance, if a bond mutual fund aimed to replicate the broad market, its performance would be compared to the index. Deviations from the index could highlight active management decisions, whether positive or negative. Understanding the yield and duration characteristics of the index also provided insights into the market's sensitivity to interest rate changes.
Hypothetical Example
Imagine an investor, Sarah, had her bond portfolio benchmarked against the Lehman Aggregate Bond Index in 2007. Her portfolio consisted of a mix of corporate bonds, government bonds, and some mortgage-backed securities. Over the course of the year, she would compare the total return of her portfolio against that of the Lehman Aggregate Bond Index.
For example, if the Lehman Aggregate Bond Index posted a total return of 5% in 2007, and Sarah's portfolio returned 5.5%, she would consider her portfolio to have outperformed the benchmark by 0.5%. This comparison would allow her to evaluate the effectiveness of her investment strategy and the quality of the individual bond selections within her portfolio. The index provided a clear, objective standard against which to measure success or identify areas for adjustment in her diversification strategy.
Practical Applications
The Lehman Aggregate Bond Index, and its modern-day equivalent, has had several practical applications within the financial industry. Its primary use was as a benchmark for passive investment vehicles such as exchange-traded funds (ETFs) and mutual funds that sought to track the performance of the U.S. investment-grade bond market. The iShares Core U.S. Aggregate Bond ETF (AGG), for example, aims to track the investment results of an index composed of the total U.S. investment-grade bond market, which is the Bloomberg US Aggregate Bond Index3,.
Beyond passive investing, active bond portfolio managers utilized the Lehman Aggregate Bond Index to evaluate their performance. By comparing their fund's returns against the index, they could determine if their active management strategies, such as sector rotation or duration management, were adding value. The index also served as a critical component in asset allocation models, helping financial advisors and investors determine appropriate fixed-income exposure within a broader portfolio. Furthermore, the index's composition provided insights into the overall health and structure of the U.S. taxable fixed-income market, including the proportion of U.S. Treasuries, corporate bonds, and securitized products2.
Limitations and Criticisms
While widely used, the Lehman Aggregate Bond Index, and aggregate bond indices in general, are not without limitations. A common criticism is their market capitalization weighting, which means that bonds with larger outstanding issues, often those from entities with higher levels of debt (like the U.S. Treasury), receive a larger allocation within the index. This can lead to increased exposure to issuers with higher debt loads, which some investors might view as a form of "investing more in the most indebted."
Additionally, the comprehensive nature of the Lehman Aggregate Bond Index meant it included a wide array of bonds, some of which might not align with every investor's specific risk tolerance or objectives. For instance, while it primarily tracks investment-grade bonds, it still carries interest rate risk and some credit risk, which can lead to fluctuations in value. Some critics also argue that the index's broad composition, while offering diversification, may dilute exposure to higher-performing niche segments of the bond market.
Lehman Aggregate Bond Index vs. Bloomberg US Aggregate Bond Index
The distinction between the Lehman Aggregate Bond Index and the Bloomberg US Aggregate Bond Index is primarily one of lineage and nomenclature rather than fundamental difference in purpose or methodology. The Lehman Aggregate Bond Index was the original name for the benchmark created by Lehman Brothers. After Lehman Brothers declared bankruptcy in 2008, Barclays acquired the index business and rebranded it as the Barclays Capital Aggregate Bond Index1. This change was largely a name alteration, with the core methodology and scope of the index remaining consistent.
Subsequently, in 2016, Bloomberg acquired the index business from Barclays, leading to another rebranding, first as the Bloomberg Barclays US Aggregate Bond Index, and now simply as the Bloomberg US Aggregate Bond Index. Therefore, the Bloomberg US Aggregate Bond Index is the direct successor and current iteration of what was once known as the Lehman Aggregate Bond Index. Both indices serve, or served, the same objective: to provide a broad, market capitalization-weighted measure of the investment-grade, fixed-rate taxable bond market in the United States. The underlying bond types, including U.S. Treasuries, agency bonds, corporate bonds, and securitized debt, remain consistent across its historical iterations.
FAQs
What types of bonds were included in the Lehman Aggregate Bond Index?
The Lehman Aggregate Bond Index included a wide variety of U.S. investment-grade bonds, such as U.S. Treasuries, government agency bonds, corporate bonds, mortgage-backed securities (MBS), and asset-backed securities (ABS). These categories ensured a broad representation of the fixed-income market.
Why is the Lehman Aggregate Bond Index no longer used?
The Lehman Aggregate Bond Index is no longer used because Lehman Brothers, the financial firm that created and maintained it, declared bankruptcy in 2008. The index business was subsequently acquired by Barclays and then by Bloomberg, which now maintains and distributes the index under the name Bloomberg US Aggregate Bond Index.
How was the Lehman Aggregate Bond Index weighted?
The Lehman Aggregate Bond Index was a market capitalization-weighted index. This means that individual bonds and segments within the index were weighted according to their total outstanding market value. Bonds with larger issuance sizes had a greater influence on the index's overall performance.
Can I still invest in an index fund that tracks the former Lehman Aggregate Bond Index?
Yes, investors can still gain exposure to the U.S. aggregate bond market by investing in exchange-traded funds (ETFs) or mutual funds that track the current Bloomberg US Aggregate Bond Index. These funds aim to replicate the performance of the broad bond market benchmark.
What is the primary purpose of an aggregate bond index?
The primary purpose of an aggregate bond index, like the former Lehman Aggregate Bond Index or the current Bloomberg US Aggregate Bond Index, is to serve as a comprehensive benchmark for the U.S. investment-grade bond market. It helps investors and portfolio managers measure the overall performance of this market segment and assess the effectiveness of their bond investments.