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

What Is the Lehman Brothers Government Bond Index?

The Lehman Brothers Government Bond Index was a historical benchmark index that measured the performance of U.S. government bonds and agency securities. As a component of the broader Lehman Brothers Aggregate Bond Index, it played a significant role in fixed-income securities analysis, providing a standard against which investment professionals could evaluate bond fund and portfolio performance. This index, and its larger parent, were key parts of the bond market's infrastructure within the category of Fixed Income Indices.

History and Origin

The foundation for what would become the Lehman Brothers Government Bond Index was established in 1973 by Kuhn, Loeb & Co., which developed initial total-return indexes for U.S. government and investment-grade corporate bonds. These were later combined to form the Government/Credit Index in 1979. Mortgage-backed securities were added in 1986, leading to the creation of the broader US Aggregate Index, which was subsequently known as the Lehman Brothers Aggregate Bond Index.²⁶

The "Lehman Brothers Government Bond Index" specifically tracked U.S. government Treasury and agency securities, serving as a subset of the Aggregate Index.²⁵ However, the name "Lehman Brothers" became a historical marker following the firm's bankruptcy in September 2008, a pivotal event during the global financial crisis. After the bankruptcy, Barclays acquired Lehman Brothers' North American investment banking and capital markets businesses, including its influential bond index family.²⁴ Consequently, the Lehman Brothers Government Bond Index, along with other Lehman indices, was rebranded as part of the Barclays Capital Indices.²³ In 2016, Bloomberg L.P. acquired Barclays' index and risk analytics business, leading to a further renaming to the Bloomberg Barclays US Aggregate Bond Index.²² The "Barclays" portion of the name was later dropped in 2021, and it is now known as the Bloomberg US Aggregate Bond Index.²⁰, ²¹

Key Takeaways

The Lehman Brothers Government Bond Index was a historical component of the broader Lehman Brothers Aggregate Bond Index, focusing specifically on U.S. government and agency debt.
It served as a key benchmark index for evaluating the performance of fixed-income securities within the U.S. bond market.
Following Lehman Brothers' bankruptcy in 2008, the index family underwent ownership changes, first to Barclays and then to Bloomberg.
The direct successor to the aggregated Lehman bond indices is now known as the Bloomberg US Aggregate Bond Index.
The index's historical evolution highlights the significant shifts in the financial landscape, particularly in bond market indexing.

Formula and Calculation

The Lehman Brothers Government Bond Index, like its successor, was a market-capitalization-weighted index. This means that the weight of each security within the index was proportional to its outstanding market value. The performance of the index, often measured as total return, encompassed both the capital appreciation or depreciation of the underlying bonds and the income generated from their coupon payments.

The total return for a bond index, including the historical Lehman Brothers Government Bond Index, can be conceptualized as:

\text{Total Return} = \frac{(\text{Ending Price} - \text{Beginning Price}) + \text{Coupon Income}}{\text{Beginning Price}}

Where:

(\text{Ending Price}) = The market value of the bond at the end of the period.
(\text{Beginning Price}) = The market value of the bond at the beginning of the period.
(\text{Coupon Income}) = The interest payments received from the bond during the period.

This calculation would be aggregated across all eligible Treasury securities and agency bonds within the index, weighted by their market capitalization. Factors like changes in interest rates significantly influence the capital appreciation or depreciation component of the total return.

Interpreting the Lehman Brothers Government Bond Index

Interpreting the Lehman Brothers Government Bond Index (or its current form, the Bloomberg US Aggregate Bond Index) involves understanding its reported performance as a reflection of the U.S. bond market segment it covers. A positive return indicates that the composite value of the underlying fixed-income securities (government and agency bonds in the case of the specific Government Bond Index) increased over a period, incorporating both price changes and interest income. Conversely, a negative return suggests a decline in value.

Investors and analysts use this index to gauge the health and direction of the U.S. government bond sector. For example, a rising index value might suggest a favorable environment for government bonds, possibly due to declining interest rates which increase bond prices. Its composition, heavily weighted towards U.S. Treasury securities, means its movements often reflect changes in U.S. monetary policy and broader economic conditions.

Hypothetical Example

Imagine an investor in 2005 who wanted to understand the performance of U.S. government and agency bonds. They would have looked at the Lehman Brothers Government Bond Index.

Let's say over a particular month in 2005:

The index started with an aggregate market value of all its constituent bonds at $1,000 billion.
During the month, the bonds paid out a total of $5 billion in coupon interest.
Due to slight decreases in market interest rates, the market value of the underlying bonds collectively increased to $1,002 billion by the end of the month.

To calculate the index's performance (total return) for that month:

Capital Appreciation: ($1,002 billion - $1,000 billion) = $2 billion
Total Income: $5 billion
Total Gain: $2 billion + $5 billion = $7 billion
Percentage Total Return: ($7 billion / $1,000 billion) * 100% = 0.70%

This hypothetical 0.70% total return would tell the investor that the U.S. government and agency bond market, as represented by the Lehman Brothers Government Bond Index, generated a positive return that month, benefiting from both coupon income and a slight increase in bond prices. This information would be crucial for assessing their own fixed-income securities holdings and guiding their portfolio management decisions.

Practical Applications

The Lehman Brothers Government Bond Index, in its historical context and through its modern successor, the Bloomberg US Aggregate Bond Index, has several practical applications in finance:

Benchmarking Investment Performance: Its primary use is as a benchmark index for active and passive fixed-income portfolios. Fund managers whose mandates include U.S. government and agency bonds often measure their performance against this index.
Passive Investing: Numerous exchange-traded funds (ETFs) and mutual funds are designed to track the performance of the Bloomberg US Aggregate Bond Index. These passive investment vehicles offer investors broad exposure to the U.S. investment grade bond market.¹⁹
Economic Indicator: The index's performance can serve as an indicator of broader economic conditions and U.S. monetary policy. For instance, strong performance in government bonds can reflect investor demand for safety during uncertain economic times.
Asset Allocation and Diversification: The index provides a reference point for investors seeking to allocate capital to the U.S. bond market as part of a diversified investment strategy. Understanding its components (e.g., Treasury securities, agency bonds, corporate bonds, mortgage-backed securities, and asset-backed securities) helps in constructing a balanced portfolio.¹⁷, ¹⁸ The current Bloomberg US Aggregate Bond Index, which evolved from the Lehman indices, includes diverse fixed-rate taxable bonds. Its detailed methodology is publicly available.¹⁶

Limitations and Criticisms

While widely used, the Lehman Brothers Government Bond Index and its successor, the Bloomberg US Aggregate Bond Index, have faced several criticisms regarding their comprehensiveness and suitability as a sole representation of the entire U.S. bond market.

One common critique is its heavy weighting towards U.S. Treasury securities and government-related debt. As of 2022, government exposure (including Treasuries, agency debt, and mortgage-backed securities) accounted for over 73% of the successor index.¹⁵ This high concentration means the index may not offer as much diversification across different sectors of the bond market as some investors might assume. It also means the index is highly sensitive to U.S. monetary policy and changes in U.S. interest rates.

Furthermore, the index only includes investment grade bonds, excluding high-yield (or "junk") bonds, municipal bonds, and certain foreign-denominated bonds.¹³, ¹⁴ This omission means it does not capture the performance of significant segments of the broader fixed-income universe, potentially limiting its effectiveness as a comprehensive market indicator for some investment strategies. Critics argue that this narrow focus might lead investors to overlook opportunities in other bond market segments or misinterpret the overall health of the entire bond market.¹² The historical data for the index largely reflects a period of generally declining interest rates, which some suggest limits its ability to represent performance across all market cycles.¹¹

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

The distinction between the "Lehman Brothers Government Bond Index" and the "Bloomberg US Aggregate Bond Index" is primarily one of historical evolution and scope. The Lehman Brothers Government Bond Index was a specific subset, focusing exclusively on U.S. government Treasury bonds and agency securities, which were considered of high credit rating. It was part of a larger family of indices managed by Lehman Brothers.

After Lehman Brothers filed for bankruptcy in 2008, its index business was acquired by Barclays. This led to the Lehman Brothers Aggregate Bond Index and its sub-indices, including the Government Bond Index, being rebranded as Barclays Capital indices. Subsequently, in 2016, Bloomberg acquired this index business from Barclays.¹⁰ Today, the most commonly referenced successor is the Bloomberg US Aggregate Bond Index.

The Bloomberg US Aggregate Bond Index is a broader benchmark index that encompasses not only U.S. Treasury securities and government agency bonds but also U.S. investment grade corporate bonds, mortgage-backed securities (MBS), and asset-backed securities (ABS).⁸, ⁹ Therefore, while the historical Lehman Brothers Government Bond Index focused on a specific segment, the Bloomberg US Aggregate Bond Index provides a more comprehensive view of the U.S. investment grade taxable bond market. The former is a historical component of the latter's lineage.

FAQs

What happened to the Lehman Brothers Government Bond Index?

The Lehman Brothers Government Bond Index, along with other Lehman bond indices, was absorbed into Barclays' index family after Lehman Brothers' bankruptcy in 2008. It was then acquired by Bloomberg in 2016 and is now part of the Bloomberg US Aggregate Bond Index, which serves as a broad benchmark index for the U.S. investment grade fixed-income market.⁶, ⁷

What types of bonds did the Lehman Brothers Government Bond Index include?

The Lehman Brothers Government Bond Index primarily tracked U.S. Treasury securities and U.S. government agency securities that were considered investment grade.⁵

Why is the Bloomberg US Aggregate Bond Index important today?

The Bloomberg US Aggregate Bond Index, as the successor to the Lehman Brothers Aggregate Bond Index, remains a vital benchmark index for the U.S. bond market. It is widely used by investors and financial professionals to measure the performance of diversified fixed-income portfolios and is tracked by many passive investment funds.³, ⁴

Does the Bloomberg US Aggregate Bond Index include all types of bonds?

No, the Bloomberg US Aggregate Bond Index only includes investment grade taxable U.S. dollar-denominated fixed-income securities. It explicitly excludes high-yield ("junk") bonds, municipal bonds, and certain other types of debt, which are tracked by different indices.¹, ²

How does the index reflect changes in interest rates?

As a bond index, its value is inversely related to interest rates. When interest rates rise, the market value of existing bonds (and thus the index) generally falls, and vice versa. The total return of the index reflects both these price changes and the yield from coupon payments.