Capital market reform 2.0 / What is Bloomberg Bond Index?

Why in News?  The Chief Economic Adviser V Anantha Nageswaran has recently said that \the country needs further capital market reform 2.0 to meet the growing needs of the economy.

He said that India will be entering into the JP Morgan government bond index. We have to deal with that and subsequently, starting in January 2025, we will also be part of the Bloomberg bond index.

What is Bloomberg Bond Index?

The Bloomberg Bond Index, also recently referred to as the Bloomberg Aggregate Bond Index (Agg), is a widely recognized benchmark for the U.S. investment-grade bond market.

Focus: It tracks the performance of a broad range of investment-grade, fixed-income securities issued in the United States. These include:

• Government bonds
• Government-related bonds
• Corporate bonds
• Asset-backed securities (ABS)
• Mortgage-backed securities (MBS)
• Maturities typically range from 1 to 10 years

Market Capitalization Weighted: The index is weighted by the market value of outstanding bonds. This means bonds issued by larger entities have a greater influence on the overall index performance.

Benchmark: The Agg serves as a benchmark for various financial instruments, including:

• Bond mutual funds
• Exchange-traded funds (ETFs) that track the bond market
• The performance of actively managed bond portfolios

Importance: By tracking the Agg, investors can gauge the overall health and performance of the U.S. investment-grade bond market. Deviations from the index’s movement can indicate broader economic trends or investor sentiment.

Variations: Bloomberg offers various sub-indices that focus on specific segments of the U.S. bond market, such as the Bloomberg US Corporate Bond Index or the Bloomberg US Treasury Bond Index.

Global Perspective: While the Agg focuses on the U.S. market, Bloomberg also has indices for global and other regional bond markets.

About J.P. Morgan bond indices:

J.P. Morgan offers several government bond indices, but the two main categories are:

1.Developed Markets Indices: These track fixed-rate issuances from high-income countries spanning the globe. Here are two prominent examples:

J.P. Morgan Government Bond Index (GBI) series: This is a flagship product that includes various sub-indices like GBI Global (covering major developed economies) and GBI Broad (covering a wider range of developed countries).

J.P. Morgan EMU Government Bond Index: This focuses on euro-denominated government debt issued by investment-grade countries within the Eurozone.

2.Emerging Markets Indices: These track the performance of local-currency-denominated sovereign bonds issued by emerging market countries. The most relevant one in this context is:

• P. Morgan Government Bond Index-Emerging Markets (GBI-EM): This is a widely followed and influential benchmark that includes local currency bonds issued by emerging economies. It has different versions, with the GBI-EM Global Diversified being the most common.