For the past few decades, the Barclays U.S. Aggregate Bond Index (known as “the Agg,” or as the Lehman U.S. Aggregate Bond Index until November 2008) has been a central reference point for bond investors — a benchmark with widespread market acceptance comparable with the S&P 500 or the Russell 2000 in the equity world.

Representing a swath of the bond market
The Agg comprises approximately $17 trillion worth of bonds, based on current market value, and is designed to include a massive landscape of U.S. investment-grade fixed-income sectors, from U.S. Treasuries and agency issues to mortgage-backed and asset-backed securities (MBS and ABS).

The Aggregate index is heavy on government and agency debt

An industry benchmark
However, the importance of the index might outweigh the attractiveness of its risk and reward profile. While the U.S. Agg is the benchmark for multi-billion dollar institutional funds as well as scores of mutual funds that seek to gain exposure to the broad spectrum of the U.S. fixed-income universe, investors whose portfolios track the Agg are missing many of the most attractive opportunities available in today’s bond market.

What the Agg fails to aggregate
At present, we see more value in the $5+ trillion worth of fixed-income securities that lie outside the Agg than within the index. Also, some of those sectors in the Agg that have not been targets of government intervention (namely, CMBS and investment-grade corporates) appear more compelling than those that have benefited from policy actions.

Government policy has produced abnormal conditions
While those sectors of the Agg that have been the focus of the Federal Reserve’s quantitative easing program generally trade at spreads that are inside their long-term pre-crisis averages, other sectors of the market that fall outside the traditional benchmarks (e.g., non-agency RMBS and some sectors of the CMO market such as agency IOs) still trade at significantly wider spreads. In many cases, these spreads are wider than they were prior to 2008.

The key here is that the sources of risk inherent in these sectors are far more diverse and much less contingent on declining interest rates to fuel returns.


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Financial professionals: Download the Putnam white paper, Revisiting “Thinking Outside the Index.”


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