Bond index funds are longer than they were.

[Jmo1969]

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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[Lsbcal]

I looked this up and found this article which includes a chart of the duration: https://www.delawareinvestments.com...stors-lets-talk-about-duration-extension.aspx

Haven't yet had time to read the article but it looks like the duration for 2008 was more like 4.5 .

 

[NW-Bound]

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?

 

[clifp]

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

 

[audreyh1]

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.

 

[NW-Bound]

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.

 

[audreyh1]

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.

 

[clifp]

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.

 

[Jmo1969]

A very detailed article written by James Moore and Scott Spalding on Pimco.com. Passive-Aggressive: Index funds and risk....


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[NW-Bound]

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.​