Investing

Bond Indices: Understanding all the angles

  • 17.NOV.2017
  • Mark Crowhurst,  Head of Trading

What is a Bond Index?

Most investors have a good understanding of the S&P/ASX 200 Index. They know that it is made up of the 200 largest stocks by market capitalisation and that the weighting also takes the stocks liquidity into account.

In the bond market, the indicies are based on who has the most debt – not who is the biggest company by market capitalisation.  There are a lot of companies within the ASX 200 that don’t issue corporate bonds or don’t issue corporate bonds in Australia.

There are 2 main bond indicies that are used in Australia;

  • The AusBond Composite 0+ Year Bond Index
  • The AusBond Credit (Corporate) 0+ Year Bond Index

Composite Bond Index

The Composite Bond Index is the main index that bond funds and the 2 biggest fixed income ETFs track. It is made up of approximately 90% government or government related bonds, with the remainder being mostly corporate credit.

To be included the Composite Bond Index the bond must satisfy the following criteria;

  • Investment grade credit rating
  • More than $100m outstanding on the bond
  • AUD fixed rate bonds only (which includes foreign entities that have AUD denominated bonds)
  • Maturity greater than 1 month
  • A bond which is governed by Australian law
  • The Index is rebalanced at the end of each month.

Index Summary

AusBond Composite 0+ Year Index
Average Maturity 6.07 years
Duration 5.12
Average Yield 2.43%

Index Composition

As bonds are issued or mature they will fall in, or out, of the Index depending on if they meet the above criteria. Since every bond that meets the above criteria is included in the Index, the average maturity of the Index can change over time.

Chart 1 shows that the average maturity of the Index has been lengthening recently, in particular when the Australian Government issued its first 30-year bond.

Chart 1: Index Maturity and Duration

Credit (Corporate) Bond Index

The Credit or Corporate Bond Index consists of over 62% government and financials. The government related portion of the Index refers to corporations that sit between sovereign government issuers on the one hand, and private credit issuers on the other. Australia Post is an example of this.

The rules of inclusion are similar to the Composite Bond Index and they include:

  • Considered a “Credit” security, including those described above.
  • Investment grade credit rating
  • More than $100m outstanding on the bond
  • AUD fixed rate bonds only (which includes foreign entities that have AUD denominated bonds)
  • Maturity greater than 1 month
  • A bond which is governed by Australian law
  • The Index is rebalanced at the end of each month.

Index Summary

The AusBond Credit (Corporate) 0+ Year Bond Index
Average Maturity 4.16 years
Duration 3.66
Average Yield 2.91%

Index Composition

Similar to the Composite Bond Index, the Credit Index’s average maturity has also increased over the last 3 years. The Index now has an average maturity of 4.16 years, increasing from 3.48 years at the end of September 2014

Chart 2: Index Maturity and Duration

Source: Bloomberg, 10 Nov 2017

Events

  • 18Dec 2017

    YTMMG1: MIRVAC 5.50% 18 DEC 2017

    This is the coupon date

  • 19Dec 2017

    YTMNVN: NOVION 5.00% 19 DEC 2019

    This is the coupon date

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