Lehman brothers aggregate bond index: Meaning, Criticisms & Real-World Uses

What Is the Lehman Brothers Aggregate Bond Index?

The Lehman Brothers Aggregate Bond Index was a pivotal benchmark in the world of fixed income, designed to broadly measure the performance of the U.S. investment grade bond market. This index, a key component within the broader financial category of fixed income benchmarks, included a wide range of taxable bonds such as U.S. government bonds, government agency bonds, mortgage-backed securities (MBS), corporate bonds, and certain asset-backed securities (ABS). It served as a widely referenced tool for investors and financial professionals to assess the health and performance of their bond portfolios against the overall market.

History and Origin

The precursor to what became the Lehman Brothers Aggregate Bond Index was co-created on July 7, 1973, by Art Lipson and John Roundtree of Kuhn, Loeb & Co., who developed two total-return indexes for U.S. bonds: the US Government and the US Investment Grade Corporate Indexes. These were later blended in 1979 to form the Government/Credit Index. In 1986, mortgage-backed securities were integrated, and the index was renamed the US Aggregate Index, with historical data backfilled to 1976.

Lehman Brothers acquired Lipson's research when it purchased Kuhn, Loeb & Co. in 1977, integrating this bond index work into its operations. The index continued under the Lehman Brothers name until a significant turning point in financial history. Following the firm's collapse in September 2008 amidst the financial crisis, Barclays Bank acquired Lehman Brothers' North American investment banking assets, including the index business.¹⁸ Consequently, the Lehman Brothers Aggregate Bond Index was renamed the Barclays Capital Aggregate Bond Index in November 2008.,¹⁷ This benchmark underwent another name change in August 2016, when Bloomberg L.P. acquired Barclays' index and risk analytics business, leading to its current designation as the Bloomberg US Aggregate Bond Index.,¹⁶

Key Takeaways

The Lehman Brothers Aggregate Bond Index was a broad-based benchmark for the U.S. investment-grade bond market.¹⁵
It tracked the performance of U.S. Treasury, government agency, corporate, mortgage-backed, and asset-backed securities.
The index was widely used to evaluate the performance of fixed income portfolios.¹⁴
It underwent name changes, first becoming the Barclays Capital Aggregate Bond Index, and later the Bloomberg US Aggregate Bond Index, after changes in ownership.

Interpreting the Index

The Lehman Brothers Aggregate Bond Index, and its successor, the Bloomberg US Aggregate Bond Index, provides a comprehensive view of a significant segment of the U.S. bond market. Investors interpret the index's performance as a proxy for the returns available from diversified, high-quality U.S. bonds. A positive return in the index indicates that the aggregate value of its constituent bonds has increased, either due to rising bond prices (often when interest rates fall) or the accumulation of interest payments. Conversely, a negative return suggests that the overall value of bonds within the index has declined.

When evaluating the index, market participants consider its yield and duration. Yield provides an indication of the income stream, while duration measures the index's sensitivity to changes in interest rates. A longer duration implies greater price volatility for a given change in interest rates. The composition of the index, heavily weighted towards government and corporate debt, also informs interpretation, as these sectors behave differently under various economic conditions.

Hypothetical Example

Imagine an investor, Sarah, who wanted to assess the performance of her bond portfolio in 2007, when the index was still known as the Lehman Brothers Aggregate Bond Index. Her portfolio consisted of a mix of U.S. Treasury bonds, corporate bonds, and some mortgage-backed securities.

At the end of 2007, Sarah would look up the total return of the Lehman Brothers Aggregate Bond Index for that year. Let's assume, for this hypothetical example, that the index returned +6.5%. Sarah would then compare her portfolio's return to this benchmark. If her portfolio returned +7.2% for the year, she could conclude that her bond portfolio had outperformed the overall investment-grade U.S. bond market as represented by the Lehman Brothers Aggregate Bond Index. Conversely, if her portfolio returned +5.0%, it would indicate underperformance relative to the benchmark. This comparison helps Sarah understand if her portfolio diversification and bond selections were effective relative to the broader market.

Practical Applications

The Lehman Brothers Aggregate Bond Index, and its current iteration, the Bloomberg US Aggregate Bond Index, serves several crucial functions in investment management and analysis:

Benchmark for Bond Portfolios: It is widely used by institutional and individual investors as a benchmark to measure the performance of their fixed income investments. This allows them to evaluate whether their portfolio managers are adding value relative to a broad market standard.
Basis for Index Funds and Exchange-Traded Funds (ETFs): Numerous passive investment products, such as the iShares Core U.S. Aggregate Bond ETF (AGG) and Vanguard Total Bond Market Index Fund (VBTLX), are designed to track the performance of this index, providing investors with broad exposure to the U.S. bond market.,¹³ These products are popular among investors aiming for low-cost diversification.
Economic Indicator: Changes in the index's performance can provide insights into prevailing interest rates, credit conditions, and investor sentiment within the U.S. bond market, offering a snapshot of economic health.¹²
Asset Allocation Tool: Financial advisors and strategists use the index's characteristics to help construct diversified portfolios, determining the appropriate allocation to U.S. investment-grade bonds based on a client's risk tolerance and investment objectives. Investors can explore the current scope and methodology of this benchmark through official resources such as the Bloomberg Fixed Income Indices overview.

Limitations and Criticisms

While the Lehman Brothers Aggregate Bond Index (now Bloomberg US Aggregate Bond Index) is a widely accepted benchmark, it faces several limitations and criticisms:

Market-Capitalization Weighting: The index is weighted by market capitalization, meaning that entities with more outstanding debt have a larger weighting in the index. This can lead to a concentration in the debt of the largest issuers, including the U.S. government, which has increased significantly over time.,¹¹ Some critics argue this means the index overweights the most indebted entities, potentially exposing investors to greater credit risk or interest rate risk.¹⁰
Interest Rate Sensitivity (Duration): The index's duration has increased over time, making it more sensitive to changes in interest rates.⁹,⁸ While rising interest rates can offer higher future yields, they can also lead to short-term price declines in existing bonds, impacting total returns.⁷
Exclusions: The index specifically excludes certain bond types, such as municipal bonds and Treasury Inflation-Protected Securities (TIPS), which can limit its representation of the entire U.S. bond universe for some investors.,⁶
Underperformance vs. Active Management: Some research suggests that due to the structure and inefficiencies within the fixed income market, the Bloomberg Aggregate Index (and its predecessors) tends to underperform many active fixed income strategies over longer time periods.⁵ Active managers often seek to outperform by strategically overweighting certain sectors or durations, or by investing in areas not fully captured by the index. This perspective is elaborated upon in analyses such as "Fixed Income Indexing: A Commitment to the Bottom" from Marquette Associates.

Lehman Brothers Aggregate Bond Index vs. Bloomberg US Aggregate Bond Index

The distinction between the Lehman Brothers Aggregate Bond Index and the Bloomberg US Aggregate Bond Index primarily lies in their naming and the entities maintaining them over time, rather than a fundamental difference in their underlying methodology or objective. The Lehman Brothers Aggregate Bond Index was the original name for this prominent fixed income benchmark when it was maintained by Lehman Brothers. However, following the firm's collapse and acquisition by Barclays in 2008, the index was renamed the Barclays Capital Aggregate Bond Index.,⁴ Later, in 2016, Bloomberg L.P. acquired the index business from Barclays, leading to its current name, the Bloomberg US Aggregate Bond Index.,³ Therefore, the Bloomberg US Aggregate Bond Index is simply the contemporary evolution of the index that was once known as the Lehman Brothers Aggregate Bond Index. Both aim to track the performance of the broad U.S. investment grade bond market, though their specific rules and compositions have evolved slightly over decades to reflect market changes.

FAQs

What types of bonds are included in the Lehman Brothers Aggregate Bond Index?

The Lehman Brothers Aggregate Bond Index, and its subsequent iterations, primarily included U.S. Treasury securities, government agency bonds, corporate bonds, mortgage-backed securities, and asset-backed securities. All included bonds had to be investment grade and meet certain maturity and liquidity criteria.,²

Why did the name change from Lehman Brothers Aggregate Bond Index?

The name changed due to corporate acquisitions. After Lehman Brothers went bankrupt in 2008, Barclays acquired its index business, renaming it the Barclays Capital Aggregate Bond Index. In 2016, Bloomberg acquired this business from Barclays, leading to the current name, Bloomberg US Aggregate Bond Index.

How do investors use this index?

Investors primarily use the index as a benchmark to measure the performance of their fixed income portfolios. It also serves as the underlying index for many passive index funds and exchange-traded funds, allowing investors to gain diversified exposure to the U.S. bond market.

Does the index include all U.S. bonds?

No, the index does not include all U.S. bonds. It focuses specifically on investment-grade, taxable bonds. It excludes certain segments like municipal bonds and Treasury Inflation-Protected Securities (TIPS), as well as high-yield (junk) bonds.,¹