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Bond index funds are longer than they were.
Old 01-07-2015, 10:21 AM   #1
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Bond index funds are longer than they were.

The Barclays US aggregate index bond fund has increased from a 3.7year duration (2008) to a 5.6 year duration today. Basically the index fund you bought 5-6 years ago has significantly more interest rate risk today near the lows in yield. Something to ponder.


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Old 01-07-2015, 10:54 AM   #2
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I looked this up and found this article which includes a chart of the duration: https://www.delawareinvestments.com/...extension.aspx

Haven't yet had time to read the article but it looks like the duration for 2008 was more like 4.5 .
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Old 01-07-2015, 11:11 AM   #3
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How is this bond index determined, I wonder?

It is based on something objective and the duration lengthening is a fall-out of that criteria, and not because of yield chasing, right?
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Old 01-07-2015, 02:51 PM   #4
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Most are based on Barclays aggregate bond indexes. I don't completely understand how they manage the indexes, but these fact sheets are good starting points
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Old 01-07-2015, 03:01 PM   #5
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Quote:
Originally Posted by Jmo1969 View Post
The Barclays US aggregate index bond fund has increased from a 3.7year duration (2008) to a 5.6 year duration today. Basically the index fund you bought 5-6 years ago has significantly more interest rate risk today near the lows in yield. Something to ponder.


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It's been a good bet so far in 2015 as long rates continue to drop.

Personally I'm sticking with intermediate over short-term duration bond funds.
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Old 01-07-2015, 03:15 PM   #6
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Most are based on Barclays aggregate bond indexes. I don't completely understand how they manage the indexes, but these fact sheets are good starting points
I glanced at one, and still do not understand exactly how each component is weighted. Perhaps it is simply by the amount of debt outstanding, similarly to the S&P being weighted by market cap. If so, then the lengthening of the bond index simply reflects the desire of bond purchasers willing to lend money to longer durations.
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Old 01-07-2015, 03:21 PM   #7
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I glanced at one, and still do not understand exactly how each component is weighted. Perhaps it is simply by the amount of debt outstanding, similarly to the S&P being weighted by market cap. If so, then the lengthening of the bond index simply reflects the desire of bond purchasers willing to lend money to longer durations.
Yes - I believe it is an attempt to capture the characteristics of the total amount of debt outstanding.
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Old 01-07-2015, 03:41 PM   #8
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I glanced at one, and still do not understand exactly how each component is weighted. Perhaps it is simply by the amount of debt outstanding, similarly to the S&P being weighted by market cap. If so, then the lengthening of the bond index simply reflects the desire of bond purchasers willing to lend money to longer durations.
I am in the same boat, so we are either dumb, they aren't very good writers, or it is really complicated.

I know that corporations have been issuing a lot of long term debt at the low interest rates. I would assume that would length the average maturity. But the bulk of the bond market is US government debt and mortgage backed securities and I don't think the duration on the debt has changed much.
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Old 01-07-2015, 04:09 PM   #9
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A very detailed article written by James Moore and Scott Spalding on Pimco.com. Passive-Aggressive: Index funds and risk....


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Old 01-07-2015, 04:13 PM   #10
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Ah, a simple explanation in, what else, Wikipedia. I never regret making a donation to them.
Most bond indices are weighted by market capitalization. This results in the bums problem, in which less creditworthy issuers with a lot of outstanding debt constitute a larger part of the index than more creditworthy ones.
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