Mastering the Global Agg | Insight Investment

“Fixed income benchmarks are skewed towards issuers with the most debt outstanding. This creates a myriad of structural inefficiencies across bond markets that active managers can seek to exploit.”

The Bloomberg Global Aggregate Bond Index (Global Agg) is one of the world’s most widely used bond indices, encompassing the vast scale and diversity of global bond markets. This paper explores the intricacies of the Global Agg and provides insights into strategies for active managers to outperform the index.

Key Highlights:

• We revisit the Global Agg, and the major components of the index. The Global Agg includes government and government related debt, investment-grade corporate credit and securitized debt, diversified across a broad range of markets and currencies.
• Returns were volatile around the pandemic, but yields have now stabilized at higher levels, which we believe offers a more stable foundation for future returns.
• We outline nine strategies active managers can use as they seek to outperform the Global Agg, including duration and yield curve strategies, security selection, capturing new-issue premia, and more.
• The paper discusses the impact of US trade policy on bond markets, highlighting that tariff uncertainty is increasing volatility. This environment creates opportunities for active managers to exploit, as higher volatility has historically led to higher levels of outperformance.
• We discuss the risks of passive investment in fixed income markets, noting that corporate debt is increasingly concentrated in the lowest rating bucket (BBB-rated). This concentration heightens the risk of downgrades, which can force passive investors to sell at the worst possible time.

Conclusion

The Global Agg offers broad exposure to global bond markets, with substantial allocations to government-related debt and investment-grade credit. However, the structural inefficiencies in bond markets provide significant opportunities for active managers to outperform the index. The paper emphasizes the importance of an active or systematic approach to exploit these inefficiencies and turn market dynamics to an investor’s advantage.