Bloomberg Fixed Income Indices
Bloomberg Fixed Income Index Methodology 1
Bloomberg Fixed Income
Index Methodology
August 24, 2021
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 2
Our global family of fixed income indices traces its history to 1973 when the first total return bond index was created. For nearly fifty
years, these indices have been the market standard for fixed income investors seeking objective, rules-based, and representative
benchmarks to measure asset class risk and return. On August 24, 2016, Bloomberg acquired these assets from Barclays Bank PLC.
and co-branded the indices as the Bloomberg Barclays Indices for a term of five years. From August 24, 2021, we refer to them as
the Bloomberg Fixed Income Indices.
In addition to the Bloomberg Fixed Income Indices, Bloomberg also offers other index families, including the Bloomberg AusBond,
Commodity (“BCOM”), Currency Indices, and most recently Equity Indices.
● AusBond Indices are the leading fixed income benchmarks for Australia and New Zealand.
● BCOM are a family of benchmarks designed to provide liquid and diversified exposure to physical commodities through futures
contracts.
● Currency Indices offer a real time measure of the underlying currencies against a diversified, dynamic basket of emerging and
developed market currencies.
● Equity Indices are a complete set of global families covering over 99% of the available free float market cap in 49 developed
and emerging countries.
These, among other, index families have separate methodologies and are not covered in the scope of this publication. These
methodologies are available on the Bloomberg Terminal® and on the Bloomberg Index Website (www.bloomberg.com/indices).
While Bloomberg Index Services Limited (“BISL” and with its affiliates, “Bloomberg”) publishes a wide range of index primers,
factsheets, rules documents, technical notes, and index specific research in support of our products, the scope of our offering can
make it a challenge for both new and experienced index users to get a full overview of the methodology in a single publication.
This guide supplements these index-specific documents to detail index rules and methodologies for most of the Bloomberg
Indices in a single publication.
In particular, this methodology document will cover:
● Index eligibility criteria and inclusion rules
● Rebalancing rules and mechanics
● Return calculations, analytics and pricing conventions
● Weighting and aggregation rules
Understanding the methodology is an important part of the portfolio management process; as such, we understand that no single
document will answer every question that an index user may have. The index group has dedicated teams of research analysts
globally to work with clients on bespoke index and portfolio management solutions and assist clients with specific questions that
may not be addressed in this methodology. We invite readers to direct any further questions they may have to these teams to
facilitate an even stronger dialogue between index users and the research analysts who have put it together.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 3
Version Tracker*:
Date Update Owner
12 December 2018 Methodology Update for BMR requirements Sherwood Kuo
29 April 2020
Methodology Update for ESG disclosures, as well as index changes and
clarifications since previous version
Kate Onodi
24 August 2021
Methodology Update for end of co-branding agreement, and rules
changes and clarifications since previous version
Kate Onodi
*For the latest updates and rules clarifications since the last version noted above, please see INP<GO> on the Bloomberg Terminal
or contact a team member at indexhelp@bloomberg.net
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 4
Table of Contents
About Bloomberg Indices 5
Benchmark Index Design Principles 10
Benchmark Index Eligibility Rules 12
Currency 13
Sector 16
Credit Quality 24
Amount Outstanding 27
Maturity 31
Country 32
Market of Issue 37
Taxability 39
Subordination 40
Benchmark Index Rebalancing Rules 42
Benchmark Index Pricing and Analytics 50
Benchmark Index Returns Calculations and Weighting Rules 54
Appendices 63
Appendix 1: Total Return Calculations 63
Appendix 2: Index Rules for Currency Hedging and Currency Returns 67
Currency Returns and Hedging for Series-B Indices 74
Appendix 3: Detailed Discussion of Excess Return Computations 77
Appendix 4: Benchmark Index Pricing Methodology 82
US Aggregate Index Components 82
Other US Indices 83
Pan-European Indices 84
Other Pan-European Indices 84
Asian-Pacific Indices 86
EM Local Currency Government Index-Eligible Currencies 87
Price Timing & Conventions for Nominal Bonds and Convertibles 87
Inflation-Linked Indices 89
Appendix 5: Cloomberg Fixed Income Classification System and Codes 91
Appendix 6: Glossary of Terms – Index Terms 93
Appendix 7: Glossary of Terms – Index Analytics 99
Appendix 8: Glossary of Terms – Index Aggregation Values 101
Appendix 9: Index Governance and Index Methodology Considerations 102
Appendix 10: Environmental, Social and Governance Disclosures 106
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 5
About Bloomberg Indices
BISL has two core index business lines: 1) Benchmark Indices and 2) Investable Index Products.
While benchmark indices (and the risk and return characteristics they provide at the security,
sector, and asset class levels) are a fundamental part of the portfolio management process,
index demand has evolved beyond traditional long-only measures of broad market
performance. Investors now also use indices to efficiently measure and access beta, enhanced
beta, and alpha through rigorous and transparent rules-based index products. The suite of
products and services reflects this evolution and offers investors a more comprehensive
approach to portfolio management challenges.
The range of products and
services offered by
Bloomberg extends well
beyond benchmark fixed
income indices to include
investable index products
Overview
The Bloomberg index brand is most commonly associated with market-leading fixed income
and inflation-linked benchmark indices such as the Global Aggregate Index and World
Government Inflation-Linked Bond Index. However, the range of index products and services
offered by Bloomberg extends beyond benchmark indices to include investable index products
designed to offer access to systematic strategies (beta, smart beta, and alpha) across multiple
asset classes (fixed income, equities, commodities, FX, etc.). Portfolio analytics and portfolio
modeling are complementary functions available through the PORT portfolio management
platform available through the Bloomberg Terminal.
With dedicated teams in the US, Europe and Asia, Bloomberg is able to offer products and
services for a broad array of investor types and portfolio management functions. By firm type,
users of Bloomberg Indices and Bloomberg portfolio analytics and services include asset
managers, insurance companies, pension funds/plan sponsors, investment banks, commercial
banks/trust banks, central banks, sovereign wealth funds, hedge funds, ETF providers,
investment consultants, and private wealth and retail investors. By function, investment
professionals that use Bloomberg Indices and Bloomberg portfolio analytics include portfolio
managers, investment officers, asset allocators, performance analysts, risk analysts, research
analysts, traders, marketing professionals, structurers, pricing analysts, operations and market
data teams, and investment consultants.
Benchmark Indices
The Bloomberg Indices are the most widely used fixed income and inflation-linked benchmarks
and are an integral part of the active and passive global portfolio management processes. With
broad product coverage, a strong history of innovation, and objective and transparent rules,
BISL has continually been recognized as the top index provider.
1
Bloomberg Indices are also
the most widely used benchmarks for fixed income exchange traded funds (“ETFs”).
The Bloomberg index brand
can trace its roots back more
than 40 years, to 1973, with
the launch of the US
Government and US
Corporate Indices
History and Evolution
The Bloomberg Indices can trace their genealogy back to 1973, with the launch of the first
generally available total return bond indices for the US bond market: the US Government and
US Investment Grade Corporate Indices. At the request of the Bond Portfolio Managers
Association, two Kuhn Loeb researchers
2
created these new bond market benchmarks on July
7, 1973, to offer investors a performance target akin to those that had long been available for
equities. At the time, bond indices consisting of yield averages had been around for decades,
but bond total return indices did not exist.
Broad acceptance of total return debt indices took several years; however, asset management
trends in the 1970s – specifically, the need for greater portfolio accountability – contributed to
the demand for such indices. By the late 1970s, public and private plan sponsors, as well as
active money managers, had embraced these initial US Government and US Corporate Indices.
The US Aggregate Index was
created in 1986
The expansion of the platform remained largely rooted in the US capital markets during the
1980s. The Municipal Bond Index was launched in January 1980 to track the market for tax-
exempt municipal securities in the US. In 1986, the Government/Credit Index (created in 1979
and used as a first generation broad-based measure of investment grade debt) was expanded
1
Based on Evestement data for fixed income indices.
2
Art Lipson and John Roundtree were analysts at the investment bank Kuhn, Loeb & Co. when these first two indices were created. Kuhn Loeb merged with Lehman
Brothers in 1977, and the fixed income index platform existed as part of the Lehman Brothers research offering through a number of subsequent mergers and spinoffs. It
was subsequently acquired by Barclays in 2008, and then by Bloomberg in 2016.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 6
to include Mortgage Backed Securities (“MBS”) securities. This expanded second-generation
macro index was called the US Aggregate Index and was backfilled with data to 1976.
Since the mid-1980s, the global debt capital markets have evolved and expanded because of
the acceleration of economic and capital market globalization, rapid technological change and
increased availability of information, and the steady emergence of new issuers and security
types. A substantive high yield corporate market emerged first in the US and later in Europe.
Emerging markets (“EM”) debt was disintermediated from commercial banks to the public
security markets, with new countries issuing debt in hard currency, local currency, and inflation-
linked formats. Fixed- and floating-rate asset backed securities (“ABS”) were issued in the US,
Europe and Asia. Commercial mortgage backed securities (“CMBS”) and agency hybrid ARM
MBS were introduced. Inflation-linked bonds and floating-rate notes emerged as distinct fixed
income asset classes. Issuance of capital securities, hybrid instruments and convertibles
appealing to both debt and equity investors accelerated. Interest rate, currency and credit
default swaps were created and became widely used as instruments to express market views in
fixed income portfolios. Encouraged by the support of our many index users among plan
sponsors, money managers, consultants, issuers, and academics, the index franchise added
performance metrics for these new debt asset classes to match the pace of market innovation
with benchmark indices.
The Euro Aggregate Index
was launched in 1998, the
Global Aggregate in 1999,
and the Asian-Pacific
Aggregate in 2000
Indices for new asset classes, such as inflation-linked bonds,
3
ABS, CMBS, and EM, were
introduced in the 1990s. The multi-currency Global Treasury Index was launched in 1992. A third
generation of macro indices, including the US Universal Index (1999), tracking investment grade
and high yield debt in one benchmark, was originated. In tandem with market and asset
management evolution, the index franchise became a truly global platform with the creation of
the Euro Aggregate Index in July 1998, Pan-European Aggregate Index in January 1999, Asian-
Pacific Aggregate Index in July 2000, and Global Aggregate Index in January 1999. The Global
Aggregate has seen steady expansion into new investment grade debt markets since its initial
launch and now tracks 24 different local currency debt markets.
In 1997, the first Index Advisory Council was held in the US to collect external feedback to be
used in the governance of benchmark indices. Subsequent Index Advisory Councils have been
held globally in London, Singapore and Tokyo as part of the formal index governance process.
In the 2000s, US and Euro Floating-Rate Notes Indices, the Global Capital Securities, Floating
Rate ABS Indices, and a Taxable Municipal Index were introduced. In 2002, the Canadian
Aggregate Index was launched, and in March 2003, a US Convertibles Index was created, with
subsequent EMEA and APAC Convertibles Indices launched in 2010 and 2011, respectively.
Local currency indices for China (2004), Russia (2006) and India (2007) were launched to delve
deeper into new local currency debt markets. In 2007, the EM Government Inflation-Linked
Bond Index further expanded both the inflation-linked and EM index families. In 2010, a
standalone EM Local Currency Government Index family was launched tracking both Global
Aggregate eligible and non-Global Aggregate eligible nominal local currency government
debt. In 2012, the LDI Index family was launched as a new replicable benchmark for US liability
driven investors.
The evolution of indices continues at Bloomberg. In March 2017, Global Aggregate + China and
EM Local Currency Government + China Indices were launched to incorporate China’s RMB-
denominated government and policy bank debt. In March 2018, Bloomberg began adding
Chinese RMB-denominated government and policy bank debt into the flagship Global
Aggregate Index in April 2019.
Recent innovations in “smart
beta” indices include the
launch of GDP Weighted
Indices, Fiscal Strength
Weighted Indices, ESG
themed indices and Duration
Hedged Indices
While the primary expansion of the Bloomberg index platform has focused on added coverage
of new asset classes and a quest to fully map the global fixed income debt markets, there has
also been parallel development to create new measures of already covered asset classes that
reflect alternative investment themes. In 2009, float-adjusted versions of Bloomberg Indices
that exclude publicly announced government holdings were introduced, as well as GDP
weighted versions of existing flagship indices, such as the Global Treasury, Global Aggregate,
and Euro Treasury Indices. In 2011, Fiscal Strength Weighted Indices further expanded
alternative weight index offerings, integrating objective measures of a government’s financial
solvency, dependence on external financing, capacity, and governance to determine index
3
Inflation-linked indices were independently launched and offered under the Barclays and Lehman Brothers brands. These indices were unified under a single brand in
September 2008, but remained as two distinct offerings: Series-B and Series-L Indices, respectively.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 7
weights. In 2013, Bloomberg MSCI ESG Fixed Income Indices were introduced to offer debt
investors a new market standard for benchmarks that formally integrate Environmental, Social
and Governance criteria into their design. In addition, Bloomberg Mirror Futures and Duration
Hedged Indices were introduced in 2013 to provide investors with fixed income benchmarks
that replicate and hedge interest rate duration exposure of existing flagship indices using liquid
futures contracts. In 2014, the Green Bond family of indices was launched to track bonds that
use proceeds for environmental purposes.
Product Coverage
Bloomberg offers a comprehensive set of fixed income benchmarks spanning the investment
grade, high yield, inflation-linked, hard and local currency EM, municipal, and convertible
markets. Product coverage is currently at more than 70,000 securities with over USD50trn in
market value representing 120 countries and 42 local currency debt markets. Bloomberg
publishes more than 40,000 standard and bespoke indices daily. Figure 2 illustrates the
coverage of flagship benchmark index families.
Benchmark Index Solutions
Benchmark indices are used by global investors for three primary purposes: 1) as portfolio
performance targets, 2) as informational measures of security-level and asset class risk and
return characteristics, and 3) as references for index-linked products. Bloomberg offers index
users a number of benchmark-related services and solutions supporting these primary uses in
the portfolio management process.
Customized Benchmark Index Solutions
With the proliferation of standard benchmark indices offered as part of the benchmark index
platform, there has been increased demand for bespoke measures of asset classes that may be
more consistent with investor-specific portfolio objectives.
Bloomberg recognizes that no single benchmark design is universal or appropriate for all
investors. Our goal is to offer a broad and evolving suite of unbiased index products from which
investors may select or customize the most appropriate benchmark for their portfolio needs. In
addition to our flagship indices, Bloomberg now publishes thousands of bespoke benchmarks
and actively works with index users in a consultative manner on benchmark design,
methodology, back-testing, selection, and documentation of their custom indices. The types of
customizations available through the index platform are shown in Figure 1.
Figure 1
Common Types of Index Customizations
Sub-Index Type Description Examples
Enhanced Constraint
Applies a more or less stringent set of
constraints to any existing index.
Global Aggregate ex Baa
Global Aggregate 1-3 Year
Composites
Investors assign their own weights to
sectors or other index sub-components
within an overall index.
50% Global Treasury; 50%
Global Aggregate ex Treasury
Issuer Constrained
Indices that cap issuer exposure to a fixed
percentage. Options available for applying
issuer caps and redistributing excess MV to
other issuers.
Global Aggregate 2% Issuer
Capped
“Smart Beta”/
Alternative Weights
Uses other rules-based weighting schemes
instead of market value weights.
Global Aggregate GDP
Weighted
Global Aggregate Fiscal
Strength Weighted
ESG
Screened/Weighted
Applies Environmental, Social and
Governance filters and/or tilts to a standard
index.
Global Corporate Socially
Responsible Index
Global Aggregate ESG
Weighted
Duration Hedged
Indices constructed to reflect the underlying
return of an index with its duration fully or
partially hedged using a futures-based
replication (Mirror Futures Index).
Global Aggregate Duration
Hedged Index
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Bloomberg Fixed Income Index Methodology 8
Replication Strategies
The index team offers tools for clients seeking to passively replicate fixed income benchmarks
with cash bonds and/or isolate fixed income beta through other strategies and products so that
it may be repackaged in new ways (e.g., portable alpha strategies). Bloomberg also licenses its
indices to third parties for use in index replication products, such as ETFs.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 9
Figure 2
Bloomberg Fixed Income Indices
4
4
While this methodology intends to cover the general construction of most Bloomberg indices, not all of the rules discussed in this publication apply to all indices (e.g. Convertibles), while other indices have differing
methodologies (e.g. Index Replication, Breakeven Inflation, Leveraged, etc.). Hence, these other indices are covered in separate publications. See INP<Go> on the Terminal or contact indexhelp@bloomberg.net
for assistance
in accessing these supplemental materials.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 10
Benchmark Index Design Principles
The widespread use of Bloomberg benchmark indices suggests they have become the market
standard for investors seeking objective and intuitive measures of the fixed income asset class,
while providing sufficient flexibility and adaptability to offer bespoke solutions to meet a
specific investor’s constraints, preferences or guidelines. One reason for such widespread
usage is that the underlying eligibility criteria for bonds in the Bloomberg Indices adhere to the
following core design principles required for any “good” benchmark:
● Representative of the market or asset class being measured and the desired risk exposures
sought by index users.
● Replicable, offering a sufficiently sized universe without unnecessary turnover and
transaction costs.
● Objective and transparent, with clearly defined and objective rules, as well as daily visibility
into current index composition and future composition during rebalancing.
● Relevant as investment benchmarks for a diverse set of index uses, including both actively
and passively managed portfolios.
The Bloomberg Indices are designed to meet these fundamental criteria, as all indices are rules-
based with inclusion determined by transparent eligibility criteria that have been set to
accurately and comprehensively measure different fixed income asset classes. Additionally,
comprehensive statistics for each index are readily available to index users, with performance
statistics available daily for most indices.
The principal objective of this
methodology document is to
guide users through each step
of index design to better
understand the rules,
methodologies, conventions
and governance of
Bloomberg Indices
Design Principles
Understanding Portfolio Uses of Benchmark Indices
Bloomberg tends to observe three common uses for fixed income indices, which influence
preferences in index design and benchmark construction.
Portfolio Performance Targets
The most common use of indices is as a baseline performance target or benchmark for active or
passive bond portfolios. While some investors and market participants may think of benchmarks
solely in the context of ex-post performance analysis, index data are used at many different
stages of the portfolio management process (e.g., asset allocation, security selection and ex-
ante portfolio risk analysis).
Informational Measures of Asset Class Risk and Return
In addition to benchmark performance, fixed income indices are often used as informational
measures of market performance and risk characteristics. Within this context, firms use index
data in a variety of functions in the development, back-testing, evaluation and implementation
of investment strategies and market analysis.
References for Index-Linked Products
Finally, Bloomberg benchmark indices are used as a reference target for passive investment
strategies and index-linked products such as ETFs, ETNs and structured notes.
Given the variety of uses, Bloomberg recognizes that no single benchmark design is universal
or appropriate for all investors. The goal of Bloomberg Fixed Income Indices is to offer a broad,
innovative and evolving suite of fixed income indices from which investors are able to select or
customize the most appropriate benchmark for their portfolio needs. The “right” fixed income
index can be viewed as the most appropriate and replicable benchmark for a specific portfolio
objective within the context of the dedicated portfolio as well as part of an overall asset
allocation mix. As an index provider, Bloomberg remains impartial to the benchmark selection
decisions made by investors.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 11
No single benchmark design is universal or appropriate for all investors. The goal of Bloomberg Indices is to offer
a broad, innovative and evolving suite of fixed income indices from which investors are able to select or customize
the most appropriate benchmark for their portfolio needs.
Fundamental Design Questions to Construct a Fixed Income Index
Each benchmark within the Bloomberg benchmark index platform can be differentiated and
summarized by the answers to three fundamental design questions central to all indices: 1) what
investment universe is the index intending to measure?, 2) how are the return and risk
characteristics of index-eligible securities measured?, and 3) how are security-level returns and
risk characteristics weighted and aggregated to the index level?
What investment universe is the index trying to measure?
The answer here defines the universe of securities that an investor considers to be part of their
choice set. This can be explicitly defined in an investor’s portfolio guidelines, but may also
include a broader risk budget to out-of-index securities not specified by investment guidelines.
From that defined universe, the benchmark must define index-eligible securities with objective,
rules-based and transparent eligibility criteria that represent and measure the desired asset
class.
How are the risk and return characteristics of eligible securities measured?
Once an investment/index universe is defined, these securities must be measured from both a
return (pricing, coupon and principal payments) and a risk (duration, convexity and spread)
perspective.
How are security-level returns and risk characteristics weighted and aggregated to the
index level?
With these security-level risk and return characteristics measured, they must then be
aggregated to a summary or index level. How frequently the indices are rebalanced and how
the relative weights of index-eligible securities are determined are key considerations to arrive
at a final index construction.
The principal objective of this document is to guide index users through each of these steps of
the index design process to better understand existing index rules, methodologies, and
conventions for flagship Bloomberg Indices and their evolution.
Bloomberg Benchmark Index Governance
Please see Appendix 9 for details on Bloomberg’s index governance and control framework.
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Bloomberg Fixed Income Index Methodology 12
Benchmark Index Eligibility Rules
Bloomberg Fixed Income benchmark indices are constructed to measure the risk and return
characteristics of the global fixed income markets in an objective manner. Though the eligibility
criteria of specific indices will vary, all benchmarks adhere to prudent index construction
standards and guidelines.
Most importantly, Bloomberg benchmarks are rules-based, objective and transparent. Index
inclusion of individual securities and the application of published index rules are determined by
clearly defined, published eligibility criteria.
Index rules are continually monitored and reviewed by Bloomberg through a formal
governance process that seeks stakeholder feedback to ensure they remain relevant and
representative of asset class changes in an evolving market.
A common core set of
security-level attributes are
used to determine index
eligibility for most fixed
income indices
The central design of any fixed income index starts with an evaluation of security attributes to
determine whether a bond will be index eligible as of the rebalancing date. While the threshold
for inclusion varies from index to index, most benchmarks evaluate a core set of common
attributes.
This section explains the most commonly used bond index eligibility criteria and how they are
applied to a variety of Bloomberg benchmark fixed income index families. The criteria include:
● Currency denomination of a bond’s principal and interest payments.
● Sector classification of the bond issuer, recognizing the wide range of issuer types in the
fixed income market including corporate, government and securitized borrowers.
● Credit quality of a bond as measured by the ratings agencies, Moody’s, Standard and
Poor’s, and Fitch.
5
This is important for index users with investment guidelines that make a
clear distinction between investment grade (rated Baa and higher) and high yield (rated Ba
and lower) securities.
● Amount outstanding of a bond, with larger bonds generally more widely held by investors
and viewed as more liquid.
● Time to maturity of a bond’s principal repayment.
● Country of risk of the issuing entity, especially in cases where an investor may make a
distinction between developed and emerging markets in their portfolios.
● Market of issue/placement type of a security reflecting whether a bond is (or will soon be)
publicly registered, exempt from registration or privately placed. This also indicates whether
a bond is being marketed and sold to local investors only, non-local investors or globally
offered in multiple markets.
● Taxability of a security’s cash flows and principal payments from an issuer’s and an
investor’s perspective. From the issuer perspective, distinctions are made when cash
payments are made by a borrower on a pre-tax basis (debt) vs. after-tax basis (equity
dividend). From the investor perspective, bonds that offer tax-exempt proceeds (particularly
US municipal securities) are generally bought by a different investor base than taxable
bonds.
● Subordination of a security, which identifies where an investor’s claim is within the
borrower’s capital structure, distinguishing between bonds that have senior claims and
those that have subordinated claims in a credit event.
Additional attributes that are used to determine index inclusion include whether a bond
contains explicit optionality on the earlier repayment of principal (callable, putable, etc.), the
coupon type used to determine interest payments (fixed- vs. floating-rate), as well as other
considerations, such as sanctions.
6
5
Canada Aggregate family of indices additionally employ DBRS bond ratings beginning in August 2018.
6
New debt from issuers on either the US Office of Financial Assets Control (OFAC) sectoral sanctions identification list that are considered restricted transactions for US
persons or on the EU sanctions list are not eligible for Bloomberg Indices. Existing debt currently included in indices is typically eligible, but may be reviewed to see how
the sectoral sanctions have affected their liquidity and investability. If sanctions are lifted, the Bloomberg Index team will review the affected bonds to determine whether
they have become eligible to re-enter the index, provided they still meet all other index eligibility criteria.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 13
As fixed income markets continue to evolve, new types of bond features and structures are
brought to market. When evaluating new security types for the purposes of index eligibility,
Bloomberg takes a number of factors into account, including, but not limited to, existing index
rules, eligibility precedents of similar types of debt and the views of clients and internal research
teams. Often, index eligibility rules are reviewed as part of the formal index governance
process.
For questions regarding the eligibility of particular instrument types or other index rules
clarifications not addressed in this chapter, please contact the index group.
Currency
The currency of a bond’s interest and principal cash flows is a primary attribute used by
investors to segment the global fixed income market. They may seek returns in their native
currency or be willing to take additional foreign exchange risk as a source of return. The
Bloomberg benchmark index platform offers broad-based indices denominated in a single
currency, such as the US Aggregate (“USD”) and Euro Aggregate (“EUR”) Indices, as well as
multi-currency benchmarks, such as the Global Aggregate and EM Local Currency Government
Indices. Returns on multi-currency indices are calculated on both an unhedged and a currency
hedged basis in a number of reporting currencies. Additionally, returns for single-currency
indices are available in currencies other than that of the index.
For index purposes, the determination of a bond’s currency is generally straightforward, as its
prospectus and other publicly available sources will clearly state the currency denomination of
principal and coupon payments. The primary index consideration is whether a particular local
currency bond market should qualify for certain broad-based indices. Bloomberg evaluates
local currency inclusion candidates for benchmarks such as the Global Aggregate and EM Local
Currency Government to ensure that inclusion candidates meet broader index rules and are
sufficiently investable. Local currency debt markets may also be removed from existing indices if
there is a significant impairment to the investability of the market.
A bond’s currency is also important for identifying the appropriate reference curves to calculate
security risk characteristics (duration, convexity, spread, etc.).
Local currency debt market
eligibility in broad-based
indices is reviewed annually
by Bloomberg as part of its
formal governance process
Local Currency Market Inclusion
The eligibility of local currency debt markets in broad-based, multi-currency indices is reviewed
annually by Bloomberg. Historical inclusion by market is listed in Figure 3.
Global Aggregate Index Market Inclusion
To be a candidate for inclusion in broad-based, investment grade indices, such as the Global
Aggregate Index, a local currency debt market must exhibit several necessary (but not
sufficient) characteristics:
● Sovereign debt rating (long term local currency) must be investment grade using the index
credit quality classification methodology (middle rating of Moody’s, Fitch and S&P).
● The currency must be freely tradable and convertible and not exposed to exchange
controls that are designed to encumber its buying and selling by foreign investors.
● There must be an established and developed forward market or non-deliverable
forward (NDF) market for the local currency such that foreign market participants can
hedge their exposures into core currencies.
Other aspects of local market investability (market size, settlement and clearing, capital controls
and tax regimes, secondary market liquidity, accessibility for foreign investors, etc.) are
considered when assessing a market’s potential inclusion.
EM Local Currency Government Index Market Inclusion
Local market inclusion in flagship Emerging Markets Local Currency indices is also evaluated on
an annual basis and requires an established forward or NDF market for hedging for offshore
investors. The initial criterion for inclusion in this index family is whether a country is classified as
an emerging market under the indices’ EM definition.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 14
New market inclusion is also based on a minimum market size requirement of USD5bn of index-
eligible debt. Other EM-specific evaluations of investability, including capital controls and local
market accessibility for offshore investors, are considered.
Because the accessibility of local EM debt is variable and often depends on whether an investor
has an onshore presence, markets commonly characterized as difficult to gain exposure to
7
are
not included in the flagship EM Local Currency Government Index, but instead are eligible for
the broader EM Local Currency Government Universal Index. The Croatian, Egyptian, Indian
and Taiwanese government bond markets are tracked but included only in the EM Local
Government Universal Index, the broadest measure of EM local debt.
8
EM Local Currency Bonds that Settle Globally
Globally settled bonds that pay principal and accrue interest in local currency, but settle in USD
are classified as local currency bonds and qualify for local currency benchmarks. These
securities offer exposure to local currency government debt (both sovereign credit and local
FX) and are less likely to be subjected to local taxation than locally settled bonds. These bonds
became eligible for the EM Local Currency Government Index on March 1, 2011.
World Government Inflation-Linked Bond Index (“WGILB”) Market Inclusion
The WGILB is designed to include only those markets and securities in which a global
government linker fund is likely and able to invest. To be considered for index inclusion, any
new market must first satisfy the credit rating threshold of A3/A- for G7 and euro area countries
and Aa3/Aa- otherwise (using the index credit quality methodology).
Having fulfilled the qualitative assessment, an eligible market must then fulfil the minimum
market size criterion. New eligible markets must meet a minimum market size, based on
uninflated amount outstanding, of USD4bn using Refinitiv: WM/Reuters Closing Spot Rates at
4pm London time as of the last business day of each quarter. If an eligible market meets the
minimum market size, it will be added to the WGILB at the end of the following quarter.
The quarterly market size assessment applies only to developed markets that have initiated a
new linker program or revived an inactive one. For markets already included in the WGILB
Index, market size is reviewed on an annual basis, concurrently with the annual governance
process. Once added to the WGILB, the threshold for each market is lowered to USD2bn to
prevent unnecessary turnover due to short-term fluctuations, particularly in foreign exchange.
The most recent WGILB additions, New Zealand (“NZD”) and Denmark (“DKK”), were
announced as having eligible currencies for the WGILB following the 2012 annual governance
process. Subsequently, New Zealand satisfied the market size criterion at the end of third
quarter of 2013, and NZD-denominated inflation-linked bonds were subsequently included at
year-end 2013. Denmark satisfied the market size criterion at year-end 2013, and a DKK-
denominated inflation-linked government bond was subsequently included at the end of first
quarter of 2014.
7
This is generally due to the presence of capital controls, quotas or other institutional constraints.
8
Croatia and Egypt exited the flagship EM Local Currency Government Index in April 2014.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 15
Figure 3
Index Inclusion by Currency
Currency Global Aggregate Inclusion WGILB Inclusion
EM Local Currency Government
Inclusion
Argentine peso (ARS) - -
July 1, 2008 (added)
July 1, 2011 (removed)
August 1, 2017 (added)
Australian dollar (AUD)
January 1, 1990
January 1, 1997
-
Brazilian real (BRL)
-
-
July 1, 2008
British pound (GBP)
January 1, 1990
January 1, 1997
-
Canadian dollar (CAD)
January 1, 1990
January 1, 1997
-
Chilean peso (CLP)
January 1, 2005
-
July 1, 2008
Chinese renminbi (CNY)
April 1, 2019***
-
April 1, 2019***
Offshore Chinese renminbi (CNH) - - April 1, 2013*
Colombian peso (COP)
September 1, 2020
-
July 1, 2008
Croatian kuna (HRK) - - July 1, 2008*
Czech koruna (CZK)
January 1, 2005
-
July 1, 2008
Danish krone (DKK) January 1, 1990 April 1, 2014 -
Egyptian pound (EGP)
-
-
July 1, 2008*
European euro (EUR) January 1, 1990
October 1, 1998 (France)
October 1, 2003 (Italy added)
April 1, 2006 (Germany)
August 1, 2012 (Italy removed)
April 1, 2015 (Italy, Spain added)
-
Hong Kong dollar (HKD)
September 1, 2004
-
-
Hungarian forint (HUF)
January 1, 2005 (added)
November 1, 2013 (removed)
April 1, 2017 (added)
- July 1, 2008
Indian rupee (INR)
-
-
July 1, 2008*
Indonesian rupiah (IDR)
June 1, 2018 (added)
-
July 1, 2008
Israeli shekel (ILS) January 1, 2012 - July 1, 2008
Japanese yen (JPY)
January 1, 1990
May 1, 2005
-
Malaysian ringgit (MYR) January 1, 2006 - July 1, 2008
Mexican peso (MXN)
January 1, 2005
-
July 1, 2008
New Zealand dollar (NZD) January 1, 1990 January 1, 2014 -
Nigerian naira (NGN)
-
-
April 1, 2013*
Norwegian krone (NOK) January 1, 1990 - -
Peruvian sol (PEN)
September 1, 2020
-
July 1, 2008
Philippine peso (PHP)
-
-
July 1, 2008
Polish zloty (PLN)
January 1, 2005
-
July 1, 2008
Romanian leu (RON)
September 1, 2020
-
April 1, 2013
Russian ruble (RUB)
April 1, 2014
-
July 1, 2008
Singapore dollar (SGD)
January 1, 2002
-
-
South African rand (ZAR)
January 1, 2005 (added)
May 1, 2018 (removed)
- July 1, 2008
South Korean won (KRW)
January 1, 2002
-
July 1, 2008
Swedish krona (SEK)
January 1, 1990
January 1, 1997
-
Swiss franc (CHF) January 1, 2010 - -
Taiwan dollar (TWD)
January 1, 2006 (added)
January 1, 2012 (removed)
- April 1, 2013*
Thai baht (THB)
January 1, 2002 (added)
March 1, 2007 (removed)
July 1, 2008 (added)
- July 1, 2008
Turkish lira (TRY)
April 1, 2014 (added)
October 1, 2016 (removed)
- July 1, 2008
US dollar (USD)
January 1, 1990
January 1, 1997
-
Note: *Eligible for the Bloomberg Emerging Markets Local Currency Government Universal Index only. ** Italy was removed from the WGILB on
August 1, 2012 due to the credit rating rule for the WGILB Indices at the time. Eurozone ascension currencies that were historically index eligible
before adopting the EUR include the Slovak koruna (“SKK”) and the Slovenian tolar (“SIT”). ***On April 1, 2019, Bloomberg began adding Chinese
RMB-denominated government and policy bank securities to the Global Aggregate Index over a 20-month period.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 16
Sector
Sector classifications categorize bonds by industry, government affiliation or some other
grouping of ultimate issuer risk and are the basis for many key decisions in the portfolio
management process (benchmark selection, asset allocation, security selection, risk budgeting,
etc.). Granular by design, Bloomberg sector classifications are hierarchal and allow for
comparisons across sectors and within a specific peer group of issuers with similar risk
characteristics.
The fixed income asset class presents layers of complexity far greater than those in commonly
used equity classification schemes because of the diversity of issuer and security types. In
addition to corporate issuers and central government borrowers, a broad universe of
government-related entities (supranationals, local governments, government agencies) and
securitized structures with bankruptcy remote issuers or ring-fenced assets must be classified
appropriately.
The Bloomberg global
classification scheme uses
four pillars to classify bonds
by issuer type
Bloomberg Fixed Income Classification System
The Bloomberg global sector classification scheme is a widely accepted standard for investors
benchmarked to the flagship Bloomberg aggregate bond indices or a sector-based sub-
component of these indices. It is designed to reflect the large universe of corporate,
government, government-related and securitized bonds that comprise the global fixed income
investment choice set. In addition to corporate bonds, this universe also includes central
government sovereign/treasury bonds, government-related or quasi-sovereign bonds, and
securitized bonds backed by a pool of assets rather than the unsecured credit of an issuer.
9
The indices’ sector classification scheme has been modified over the years to recognize the
evolution of certain industries and security types where the existing classification scheme was
not representative of relevant peer groups. Additionally, increased granularity has been added
for sectors that have grown and where meaningful distinctions have become warranted. As
such, paramount design objectives for the global classification scheme include providing a
framework that is both enduring and allows for meaningful peer group comparisons.
10
Index-eligible bonds are divided into one of four broad categories: treasury, government-
related, corporate and securitized. Within each broad sector, there are up to three additional
layers depending on the depth and heterogeneity of issuers within the market. The indices’
global sector classification scheme can be found in Figure 4.
11
A table with classification codes is
provided in Appendix 5.
Figure 4
Bloomberg Fixed Income Classification System
Class 1 Class 2 Class 3 Class 4
Treasury
Government-Related
Agencies
Government Guarantee
Government Owned
No Guarantee
Government Sponsored
Local Authorities
Sovereign
Supranational
Corporate Industrial
Basic Industry
Chemicals, Metals & Mining, Paper
Capital Goods
Aerospace & Defense, Building Materials, Construction Machinery,
Diversified Manufacturing, Environmental, Packaging
9
The sector classification scheme is designed to classify issuer types. It does not make distinctions based on country of risk (such as emerging vs. developed market) or
security type (taxable vs. tax-exempt municipals).
10
One key consideration in the definition of sector and sub-sector peer groups is size. Additional granularity can always be offered to isolate issuers with similar risk
characteristics, but for index purposes it is important that a particular sector or sub-sector is not too sparsely populated to facilitate relevant comparisons.
11
The Bloomberg Fixed Income Classification System has been designed for fixed income securities and may at times diverge from the Bloomberg BICS classification
scheme, which was designed for equities.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 17
Class 1 Class 2 Class 3 Class 4
Communications
Cable & Satellite (called Media Cable prior to July 2014), Media &
Entertainment (called Media-Non-Cable prior to July 2014), Wireless,
Wirelines
Consumer Cyclical
Automotive, Consumer Cyclical Services, Gaming, Home
Construction, Leisure (called Entertainment prior to July 2014),
Lodging, Restaurants, Retailers*
Consumer Non-Cyclical
Consumer Products, Food & Beverage, Healthcare, Pharmaceuticals,
Supermarkets, Tobacco
Energy
Independent, Integrated, Midstream (added in July 2014), Oil Field
Services, Refining
Technology
Transportation
Airlines, Railroads, Transportation Services
Other Industrial
Utility
Electric
Natural Gas**
Other Utility
Financial Institutions
Banking
Brokerage, Asset Managers,
Exchanges (called Brokerage
prior to July 2014)
Finance Companies***
Insurance
Health Insurance, Life, P&C
REITS
Apartment, Healthcare, Office, Retail, Other
Other Financial
Securitized
MBS Pass-Through Agency Fixed-Rate^
GNMA 30y, GNMA 15y, Conventional 30y, Conventional 20y,
Conventional 15y
†
ABS
Credit Card
Auto
Student Loans
Residential Mortgages
Whole Business
Stranded Cost Utility
ABS Other
CMBS
Agency CMBS
Non-Agency CMBS
Covered
Mortgage Collateralized
Pfandbriefe, Jumbo Pfandbriefe, Non-Pfandbriefe
Public Sector Collateralized
Pfandbriefe, Jumbo Pfandbriefe, Non-Pfandbriefe
Hybrid Collateralized
Other
Pfandbriefe, Non-Pfandbriefe
* Textiles was a Class 4 sub-sector prior to July 2014.
** Distributors and Pipelines were Class 4 sub-sectors prior to July 2014.
*** Non-Captive Consumer and Non-Captive Diversified were Class 4 sub-sectors prior to July 2014. Captive Finance sub-sector was retired in
2003.
† Class 4 granularity was added in July 2014.
^ Hybrid ARMs were retired in June 2017.
Sector Hierarchy and Definitions for Taxable Indices
The following section details the classifications used at the first, second, third and fourth levels
within the indices, where applicable.
The treasury sector includes
debt issued by central
governments in its native
currency
Treasury (Class 1)
The treasury sector includes native currency debt issued by central governments. These bonds
are backed by the full faith and credit of a central government and represent one of the largest,
most liquid segments of the global bond market. There are no sub-classifications under
treasury, though index users will typically use additional segmentations by country or currency
when evaluating this sector. Both nominal and inflation-linked native currency government debt
is classified within the treasury sector.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 18
A minimum 50% ownership
rule is used to classify issuers
as government agencies
Government-Related (Class 1)
The government-related sector groups all issuers with government affiliations in a single
category. It has four sub-sectors: Agencies, Sovereign, Supranational and Local Authority. In the
case of Agencies (Class 2), there is further granularity at the Class 3 level.
● Agencies (Class 2): This broad category is designed to capture all issuers that are owned,
sponsored or whose payments are guaranteed by a government. The three sub-
classifications are:
○ Government Guaranteed (Class 3): Issues that carry direct guarantees of timely
payment of interest and principal from central governments or from government
agencies that carry direct guarantees from central government. Government ownership
is not a factor, although most entities will be government owned.
○ Government Owned No Guarantee (Class 3): Issuers that are 50% or more owned by
central governments
12
but issue debt that carries no guarantee of timely repayment. This
includes direct ownership by governments, as well as indirect ownership through other
government owned entities. This sector also includes state-owned entities that operate
under special public sector laws. Entities that are less than 50% government owned are
classified in the appropriate corporate bucket, unless the entity fits the definition of
government sponsored.
○ Government Sponsored (Class 3): Entities that are less than 50% owned by central
governments and that have no guarantee, but carry out government policies and benefit
from “closeness” to the central government. Evidence of closeness includes government
charters, government-nominated board members, government subsidies for carrying
out “social” policies, provisions for lines of credit and government policies executed at
sub-market rates with accompanying economic support from the government.
● Local Authority (Class 2): Debt issued directly by local authorities and by entities that are
50% or more owned by one or more local authorities. In the US market, taxable municipal
bonds, including Build America Bonds (BABs), fall into this category. Entities less than 50%
owned by a local authority will be classified within the appropriate corporate bucket.
● Sovereign (Class 2): The sovereign sector contains debt issued directly by central
governments, but denominated in a currency other than the governments’ native one. Due
to the issuer’s inherent foreign currency risk, investors often classify these bonds separately
from native currency treasury debt.
● Supranational (Class 2): This sector covers international organizations whose stakeholders
extend beyond a specific nation.
Corporate (Class 1)
The corporate classification and accompanying hierarchy is the most detailed component of the
Bloomberg Indices’ sector classification scheme. It is a global scheme that has been developed
and refined over the years to categorize issuers across geographic markets based on their
primary lines of business, revenue streams and operations that are used to service their debt.
Classifications are frequently reviewed by the index group in response to market events,
changes in an issuer’s ownership structure, mergers and acquisitions, divestitures, or changes in
the primary line of business. New classifications may be added on an as-needed basis if a large
segment of the market exhibits a well-defined risk profile that is not categorized in the existing
scheme, though these types of changes are uncommon.
While some fixed income sectors may appear comparable to equity sectors, they are not
interchangeable and are often different in definition, composition and placement within a
broader hierarchy. The indices’ bond classifications are specific to the global debt market and
consist of peer group definitions that include publicly traded issues, as well as debt issued by
privately held companies that may have different issuance patterns.
The corporate sector is categorized into three broad categories at the second level of the
classification scheme: Industrial, Financial Institutions and Utilities. Further classifications at the
12
The 50% ownership threshold provides a clear and objective delineation between government-related and corporate issuers. The rule promotes consistency in
implementation and is based on measurable ownership information, which is generally publicly available.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 19
third and fourth levels offer additional granularity for cross-sector and peer group comparisons.
The corporate Class 3 and Class 4 sub-sectors are:
● Industrials (Class 2)
○ Basic Industry (Class 3): Class 4 sub-sectors include Chemicals, Metals & Mining and
Paper.
○ Capital Good (Class 3): Class 4 sub-sectors include Aerospace & Defense, Building
Materials, Construction Machinery, Diversified Manufacturing, Environmental and
Packaging.
○ Communications (Class 3): Class 4 sub-sectors include Cable & Satellite (called Media-
Cable prior to July 2014), Media & Entertainment (called Media Non-Cable prior to July
2014), Wireless and Wirelines.
○ Consumer Cyclical (Class 3): Class 4 sub-sectors include Automotive, Consumer
Cyclical Services, Gaming, Home Construction, Leisure (called Entertainment prior to
July 2014), Lodging, Restaurants and Retailers.
13
○ Consumer Non-Cyclical (Class 3): Class 4 sub-sectors include Consumer Products,
Food & Beverage, Healthcare, Pharmaceuticals, Supermarkets and Tobacco.
○ Energy (Class 3): Class 4 sub-sectors include Independent, Integrated, Midstream
(added in July 2014), Oil Field Services and Refining.
○ Technology (Class 3)
○ Transportation (Class 3): Class 4 sub-sectors include Airlines, Railroads and
Transportation Services.
○ Other Industrial (Class 3)
● Utilities (Class 2)
○ Electric (Class 3)
○ Natural Gas (Class 3)
14
○ Other Utility (Class 3)
● Financial Institutions (Class 2)
○ Banking (Class 3)
○ Brokerage, Asset Managers and Exchanges (Class 3)
15
○ Finance Companies (Class 3)
16
○ Insurance (Class 3): Class 4 sub-sectors include Health Insurance, Life and P&C.
○ REITS (Class 3):
17
Class 4 sub-sectors include Apartment, Healthcare, Office, Retail, and
Other (all Class 4 sub-sectors added in July 2014).
○ Other Finance (Class 3)
Securitized (Class 1)
The securitized sector is designed to capture fixed income instruments whose payments are
backed or directly derived from a pool of assets that is protected or ring-fenced from the credit
of a particular issuer (either by bankruptcy remote special purpose vehicle or bond covenant).
Underlying collateral for securitized bonds can include residential mortgages, commercial
13
Textiles sector was retired on July 1, 2014.
14
In July 2014, Class 4 sub-sectors for Distributors and Pipelines were retired. Pipeline issuers and non-investment grade natural gas distributors were reclassified to the
newly created Midstream sub-sector, and investment grade natural gas distributors remained under Natural Gas.
15
Prior to 2014, this sector was solely named Brokerage. Many issuers within this sector moved from brokerage to banking in 2008 when many broker-dealers
reorganized as bank holding companies.
16
In October 2003, the sector “captive finance” was removed from the index classification schema. All securities in it were reclassified to reflect the sector of the parent
company. Captive finance companies are subsidiaries whose purpose is to provide financing to customers buying the parent company’s product. They are usually wholly
owned by the parent company. Although there are numerous examples, the best known one is in the automotive industry. General Motors has General Motors
Acceptance Corporation (“GMAC”), Daimler Chrysler has Chrysler Financial and the Ford Motor Company has Ford Motor Credit Company (“FMCC”). In July 2014,
remaining Non-Captive Consumer and Non-Captive Diversified sub-sectors were retired and collapsed into the single Class 3 Finance Companies category.
17
Industrial issuers that have reorganized or are structured as REITS for tax purposes are classified within their respective industrial peer group.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 20
mortgages, public sector loans, auto loans or credit card payments.
18
There are four main sub-
components of the securitized sector: MBS Pass-Through, ABS, CMBS and Covered.
● MBS Pass-Through (Class 2): Fixed income structures that pool residential mortgage loans
with similar characteristics into a mortgage backed security and then allocate principal and
interest payments of underlying loans to bond holders. This sector includes agency and
non-agency issuers, but only agency issuers (FNMA, FHLMC and GNMA) are eligible for the
indices.
19
Beginning July 2019, the indices reflect both 45- and 55-day delay Freddie
securities to reflect the UMBS initiative.
○ Agency Fixed-Rate (Class 3): Sub-sectors include GNMA 30 Year, GNMA 15 Year,
Conventional 30 Year, Conventional 20 Year, and Conventional 15 Year.
20
○ Non-Agency (Class 3): This classification captures non-agency mortgage pass-throughs
in the US and mortgage pass-throughs denominated in non-USD currencies.
● ABS (Class 2): Within ABS, Class 3 sub-sectors are based on collateral types, though not all
are represented in fixed- or floating-rate indices: auto, credit card, residential mortgages,
stranded cost utility, student loans and whole business.
21
● CMBS (Class 2): CMBS are backed by commercial real estate loans or multi-family
properties. Effective July 2014, Class 3 sub-sectors differentiate between agency CMBS and
non-agency CMBS. Other index classifications are used in this market (CMBS 2.0, ERISA-
eligible, etc.) to segment the asset class further, but they are not part of the core
classification scheme.
● Covered (Class 2): Covered bonds are recourse debt instruments that are secured by a
ring-fenced pool of assets on an issuer’s balance sheet (commercial real estate, residential
mortgages, public sector loans or other assets).
22
Investors having recourse to the originator
is the defining difference between covered bonds and ABS.
23
Securities that are issued
under the Pfandbriefe Act in Germany and similar bonds in other jurisdictions (non-
Pfandbriefe) are classified as covered bonds under this definition.
○ Mortgage Collateralized (Class 3): Bonds collateralized by residential and commercial
real estate. Class 4 sub-sectors include Pfandbriefe, Jumbo Pfandbriefe and Non-
Pfandbriefe. Danish MBS are classified as Non-Pfandbriefe.
○ Public Sector Collateralized (Class 3): Bonds collateralized by public sector loans.
Class 4 sub-sectors include Pfandbriefe, Jumbo Pfandbriefe and Non-Pfandbriefe public
sector loans.
○ Hybrid Collateralized (Class 3): Bonds collateralized by a combination of public sector
loans, mortgages and/or other assets.
24
○ Other (Class 3): Bonds collateralized by single asset classes other than real estate or
public sector loans. Two Class 4 sub-sectors distinguish between Pfandbriefe and Non-
Pfandbriefe.
Bloomberg looks at several
factors when assigning a new
classification or reviewing a
current classification
Sector Assignment and Reclassifications
Bloomberg looks at a number of factors when assigning a Fixed Income sector classification or
reviewing a current classification. These include an issuer’s business lines and sources of
revenue, as well as an evaluation of comparable companies with similar risk profiles or
organizational structures. Sector classification can change due to various factors:
18
Instruments such as CMOs that package other bonds into a new security are not index-eligible.
19
Hybrid ARMs Class 3 sector was retired on June 1, 2017.
20
MBS balloons were retired on January 1, 2008.
21
ABS home equity loan sector was retired on October 1, 2009, and manufactured housing sector was retired on January 1, 2008. Starting from May 1, 2021, the ABS
sector also includes motorcycle ABS (under the Auto ABS class), equipment ABS (under Other ABS class), and device payment plan (also under Other ABS class).
22
For purposes of rules clarity, the Covered Bond Index will exclude bonds that primarily contain fixed income securities issued by third parties (other than the issuer) in
the cover pool.
23
The category includes “structured covered bonds,” for which securitization techniques have been used to enhance the rating of the covered bonds, but the issuing
entity is usually not bankruptcy remote. Structured covered issues are not governed by national covered bond legislation and regulation, while covered bonds are,
where such guidelines exist. These bonds fall under “Other Covered” at the Class 3 level.
24
There are no hybrid Pfandbriefe, so there are no Class 4 sub-sectors.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 21
● Corporate Actions: In the case of corporate actions, such as a merger, acquisition or spin-
off, the classifications may be updated to better reflect the business lines of the new
entities.
25
For example, in January 2013, Abbott Laboratories spun off its pharmaceutical
business into a separate entity, AbbVie. The Abbott Laboratories bonds were reclassified
from Consumer Non-Cyclical > Pharmaceuticals to Consumer Non-Cyclical > Healthcare to
reflect the business line of the remaining entity after the separation.
● Change in Government Ownership: A move between corporate and government-related
may result from a decrease or increase in a government’s ownership stake.
26
In March 2013,
for example, the ownership stake of the Japanese government in Japan Tobacco Inc.
decreased from 52.5% to 36.7% after a Japan Tobacco Inc. share repurchase and secondary
offering. As a result, the sector for JAPTOB bonds in the indices was updated from
Government-Related > Agencies to Industrial > Consumer Non-Cyclical > Tobacco. While
membership in broad-based Asian-Pacific Aggregate and Global Aggregate Indices was not
affected, the JAPTOB bonds did become eligible for corporate sub-indices of the broad-
based aggregate benchmarks.
● Evolution of Business Lines: If the business lines of a corporate entity shift, it could be
reclassified to reflect its new peer group. For example, in January 2013, Ally Financial Inc.
issues were reclassified to reflect the firm’s increased operations as a traditional bank
holding company and migration away from a legacy finance company structure. The
classification for bonds within the indices was updated from Financial Institutions > Finance
Companies to Financial Institutions > Banking.
Issuers with diverse business lines can present a challenge when cases can be made for
multiple classifications. Whether assigning a classification to a new issuer or reviewing
classifications of existing ones, Bloomberg evaluates all publicly available information on a
given entity to assign the most appropriate classification.
Evolution of the Bloomberg Fixed Income Classification System
As discussed above, bonds are divided into four main sectors at the Class 1 level in the
Bloomberg classification scheme. Prior to January 2005, a three-pillar scheme was used,
classifying bonds into government,
27
credit and securitized sectors at the first level. One of the
primary reasons for the sector changes made in 2005 was to make the scheme global in nature
and not reflective of the perspective of a single region. Consequently, the notion of “foreign” in
existing classifications (used in the foreign local agencies and foreign local government sectors)
was removed and the bonds were reclassified within the new government-related sector. The
change eliminated classification differences arising when government, government agencies
and local authorities issue bonds in their native (domestic) and non-native (foreign) currencies.
The government-related sector introduced in 2005 was designed to categorize issuer-level risk
in a more descriptive manner by grouping all issuers with government affiliations separately
from treasury or corporate issuers. Moreover, the three sub-classifications within the Agencies
sector (government guarantee, government owned no guarantee and government sponsored)
more accurately segregated agency issuers based on their government relationships. Figure 5
provides the relationship between the classification scheme before and after the change.
25
Due to potential uncertainty and complications surrounding corporate actions, changes to classifications for index purposes take effect after the close of transaction
rather than following the announcement.
26
Over the years, government-owned entities have been candidates for full or partial privatization. These processes can often be time consuming, reflecting their often-
political nature and the difficulties in evaluating the companies as standalone entities. Taking into account such factors, privatization candidates are moved to the
appropriate corporate sector only when their share sales take place, not when they are first announced.
27
While the three-pillar scheme has been retired, many benchmark indices are still based off the “government” definition of native-currency agency bonds and
treasuries. Legacy (Series-B) indices, including Bloomberg Government Inflation-Linked and Bloomberg Government (Series-B) Indices, define “government” as
including only treasury bonds (local currency debt issued by central governments).
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 22
Figure 5
Bloomberg Sector Classification Scheme: Before and After January 1, 2005
The most recent changes, effective July 2014, include the creation of several new sectors at the
Class 3 and Class 4 levels, renaming of certain existing sectors and retirement of others.
Municipal Index Classifications
Due to the unique nature of this asset class, Bloomberg uses a classification scheme that is
unique to the risk factors associated with the municipal market for related indices.
Municipal Index Classifications
For the tax-exempt municipal market, bonds in the Bloomberg Municipal Bond Index are
categorized into the following sector types
28
:
1. Pre-Refunded: Bonds backed by special US Treasury issuance or other high quality bonds;
this supersedes all other sector designations.
2. General Obligation (“GO”): Bonds that have not been pre-refunded and are backed by the
credit of the issuing entity, not a directed revenue stream or project.
3. Revenue: Bonds that have not been pre-refunded that are backed by revenue generating
projects as a funding source.
28
Effective November 2019, US Municipals classification system was enhanced with extra granularity, and a previously used fourth sector type, Insured, has been retired.
Government Credit Securitized
Treasury Government-Related
Corporate
Securitized
MBS Pass-through
ABS
CMBS
Pfandbriefe
Other Mortgage
Non-Corporate
Foreign Agency
Foreign Local
Government
Sovereign
Supranational
Industrial
Utility
Financial
Institutions
Agency
Local Government
Treasury Corporate
MBS Pass-through
ABS
CMBS
Covered
Industrial
Utility
Financial
Institutions
Agency
Mortgage
Collateral
Public Sector
Hybrid
Government
Guarantee
Government
Owned No
Guarantee
Government
Sponsored
Other
Local Authority
Sovereign
Supranational
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 23
Municipal bonds are also classified into municipal-specific classes 2 and 3. The scheme is
detailed in Figure 6.
Figure 6
Municipal Index Classification Scheme
Class 1 Class 2 Class 3
Municipals
State
State
Local
County
City
Tax Backed District
School District
Guaranteed
Education
Higher Education
Private Schools
Charter Schools
Health Care
Hospitals, Treatment/ Research Centers
Nursing Homes/ Assisted Living
Continued Care Retirement Center
Lease
Education Lease
Ad Valorem Lease
Government Lease
Appropriation
Housing
Single Family
Multi Family
Student Housing
IDR/ PCR
Tobacco
Gas Forwards
Resource Recovery
Economic and Industrial Development
Power
Electric and Public Power
Combined Utilities
Water/ Sewer
Transportation
Airport
Tollroad, Bridges & Tunnels
Farebox (Mass & Rapid Transit)
Port/ Marina
Parking Facilities
Special Tax
Sales Tax
Bond Bank
Special Assessment
Miscellaneous Tax
Income Tax
Tax Increment Financing
Mello Roos
Other Other
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 24
Credit Quality
The credit rating of a security is a key classification in the fixed income market, with a clear
distinction between investment grade (Baa3/BBB- or higher) and high yield (Ba1/BB+ or lower)
debt. Investment grade and high yield portfolios are often managed separately (though
portfolio guidelines may allow a certain degree of crossover), which requires a clear rules-based
delineation for index purposes.
An added layer of complexity exists in the assignment of credit quality because the rating
agencies used in index classifications (Moody’s, Standard & Poor’s and Fitch) may assign a
different rating to the same security. Bloomberg uses multiple ratings sources to classify
securities appropriately, including bond-level ratings from the different agencies, issuer ratings,
and foreign or local currency sovereign debt ratings.
Bloomberg uses the middle
rating of Moody’s, S&P and
Fitch to determine a security’s
credit classification for most
indices
Bloomberg Index Rating
Bloomberg uses the middle rating of Moody’s, S&P and Fitch
29
to determine a security’s credit
classification or index rating.
30
This essentially works as a “two-out-of-three” rule because at
least two of the three agencies need to rate a bond as investment grade to qualify it for
investment grade indices (or two agencies to rate it as high yield to qualify it for the high yield
indices).
If only two agencies rate a security, the more conservative (lower) rating is used. If only one
rates a security, that single rating is used. Situations where no security level ratings are available
are discussed later in this section.
31
Below are three examples using specific issues as of August 31, 2018:
1. Murphy Oil Corp., 7.05% Coupon, Maturing May 1, 2029
Moody’s Rating: Ba3
S&P Rating: BBB-
Fitch Rating: BB
Index Rating: Ba2/BB
Despite S&P’s investment grade rating of BBB-, this issue is still classified as high yield for
index purposes since Moody’s and Fitch have it rated as high yield.
2. Devon Energy Corp., 5.6% Coupon, Maturing July 15, 2041
Moody’s Rating: Ba1
S&P Rating: BBB
Fitch Rating: BBB+
Index Rating: Baa2/BBB
This issue has an index rating of Baa2/BBB because the Moody’s rating (lowest) and the
Fitch rating (highest) would be dropped.
Sysco Corp., Coupon 3.3%, Maturing July 15, 2026
Moody’s Rating: A3
S&P Rating: BBB+
Fitch Rating: NR
Index Rating: Baa1/BBB+
This issue has an index classification of Baa1/BBB+, as Fitch rating is not available, and the
more conservative S&P rating of the two available ratings is taken.
29
Bloomberg does not currently supplement the ratings of Moody’s, Fitch and S&P with that of other ratings agencies for most asset classes or sub-sets of the global
fixed income markets for index purposes (except the Canadian Aggregate Indices). However, the use of additional ratings sources is reviewed with index users on a
periodic basis through the annual governance process.
30
Though S&P and Fitch ratings are used in determining an index rating, Moody’s nomenclature is used for all bonds. Ratings may be solicited or unsolicited.
31
The only indices that additionally employ a fourth rating agency, DBRS, in the determination of index rating are the Canadian Aggregate family of indices beginning on
August 1, 2018. For these indices only, index rating is determined by removing the highest and lowest of four ratings, and taking the lower of the two remaining ratings. If
fewer than four ratings are available, the existing standard methodology based on three or fewer ratings is used.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 25
Evolution of the Index Rating Methodology
Bloomberg has revised the rules used for credit quality classification over the years to
incorporate additional information about issuers/issues that would 1) enhance the usability and
design of the indices, 2) prevent sudden and unwanted turnover due to ratings changes, and 3)
offer multiple views on issuer credit worthiness, especially in cases where there may be
differences in opinion.
32
Of the three agencies used for most indices, Fitch ratings were most recently incorporated into
the index rules on credit quality in July 2005. Prior to 2005, the index rating was assigned by
taking the lower or more conservative of S&P and Moody’s ratings. The addition of Fitch
afforded a more consensus opinion, in addition to promoting longer-term index rating stability.
The advantage of this method, as opposed to a most conservative rule, is that at least two
agencies need to agree on a rating to prompt an index rating change.
33
The original method to classify bonds by credit quality within the indices applied a 50% split of
a security’s index weight based on Moody’s and S&P ratings for investment grade indices when
both ratings were available. However, this approach proved sub-optimal in cases of split-rated
issues (bonds rated investment grade by one agency and non-investment grade by the other
agency), where only half of the security’s weight was included in the investment grade index. As
a result, on August 1, 1988, the method was revised to use Moody’s as the primary rating agency
for index classification, with S&P as the secondary source where Moody’s did not rate an issue.
This clear, easily followed rule remained for a time, but investor interest for a more inclusive
approach that did not rely on a single arbiter of credit quality prompted a change in 2003.
34
On
October 1, 2003, rules for credit quality classification evolved to incorporate S&P more broadly
into the classification and use the more conservative or lower rating between S&P and Moody’s
for index inclusion purposes.
35
Index user interest in an even more inclusive set of criteria and
the desire to mitigate further the reliance on a single outlier agency prompted the addition of
Fitch ratings in 2005 and the transition to the use of the middle of three ratings.
Sovereign Ratings
Sovereign ratings are assigned by the rating agencies as a measure of the capacity and
commitment of central governments to repay their outstanding debt obligations. Local currency
treasury and hard currency sovereign issues are classified using the middle sovereign
36
rating
from Moody’s, Fitch and S&P for all outstanding bonds even if bond-level ratings are available.
37
The middle sovereign rating is applied uniformly as the “index rating” at the bond level across
all treasury bonds, even if bond-level ratings show as NR for one or more agencies.
38
This rule is
also applied in cases where issuers that are backed by a central government have ratings for
some, but not all securities at the bond level. To prevent split ratings for such issuers, the
sovereign rating may be applied as the index rating to all bonds from that issuer.
39
32
The three ratings agencies used for most indices are widely accepted and followed by index users in their own credit evaluations, and offer wide coverage of the
global fixed income markets.
33
Prior to January 1, 2011, Series-B inflation-linked and government bond indices used the lower of the Moody’s and S&P ratings only. The middle of the three ratings of
Moody’s, S&P and Fitch is now used instead.
34
Index user interest in the use of additional ratings agencies gained considerable momentum after credit market volatility in 2002.
35
Upon implementation of this change, the movement of securities out of investment grade and into high yield indices was minimal, with 28 securities (USD6.6bn by
market value) dropping out of the US Aggregate Index and entering the US HY Index.
36
The long-term local currency sovereign rating is used for treasury issues; the long-term foreign currency sovereign rating is used for sovereign issues for all currencies
except USD and CAD. For sovereign bonds denominated in USD and CAD, bond-level ratings are used.
37
For example, Japan’s sovereign rating is assigned to all Japanese government, government-guaranteed Japanese agency and local government securities
denominated in JPY. Similarly, all US MBS pass-throughs are assigned the US government rating for all agencies, even though the MBS pools themselves are not
explicitly rated.
38
US Agencies are assigned the same rating as US Treasuries.
39
Effective May 1, 2018, if the local sovereign debt of a currency is not eligible for the Global Aggregate Index, then no other securities denominated in that currency will
be eligible, regardless of the securities' issue-level ratings.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 26
Credit quality may be
assigned using an expected
rating, issuer rating or
sovereign rating when bond-
level ratings are unavailable
Classifications when Bond-Level Ratings are Unavailable
In certain cases, bond-level ratings for index-eligible securities may not be available, while other
assessments of credit quality, such as expected ratings or issuer-level ratings, are. The following
rules are used to assign credit quality in such situations. They may be applied for short-term
purposes where the absence of a rating may be temporary or in longer-term cases where a
rating agency only offers issuer-level ratings, not bond-level ratings.
Use of Expected Ratings
When the credit rating assigned by a rating agency is referred to as “expected,” it generally
indicates that a rating has been assigned based on the agency’s expectations of receiving final
documentation from the issuer. Once the final documentation is received and reflects the
agency’s expectations, the expected rating is converted to a final rating. Expected ratings at
issuance may be used to ensure timely index inclusion or to classify split-rated issuers properly.
For example, if a bond has one confirmed high yield rating and one confirmed investment
grade rating, a third unconfirmed rating may be used to prevent unnecessary index turnover
between high yield and investment grade indices once the third rating is confirmed.
Issuer Ratings
For unrated senior securities from issuers with other index-eligible bonds, Bloomberg may
apply the issuer rating that exists on any existing senior bond. For unrated subordinated
securities, Bloomberg may apply the issuer subordinated rating. In cases where there is no
subordinated rating, subordinated bonds will be excluded from the indices. In both cases, the
middle issuer rating will be displayed at the security level as the “index rating”, while the ratings
for each agency will be displayed as NR. Issuer ratings are not used in cases where there are
confirmed bond-level ratings from at least one agency.
Ratings for Pfandbriefe
German Pfandbriefe are assigned ratings that are one full rating category above the issuer’s
unsecured debt rating.
Average Quality at the Index Level
A linear numeric system is used to average the bond-level index ratings. The index rating of
each bond is assigned a numeric value from 2 to 24, and the constituents’ numeric ratings are
market value weighted to arrive at the aggregate average quality for the index (Figure 7).
Figure 7
Numeric Value of Quality Ratings
Numeric Value Index Rating Moody Rating S&P Rating Fitch Rating
2
AAA
AAA
AAA
AAA
3 Aa1 Aa1 AA+ AA+
4
Aa2
Aa2
AA
AA
5 Aa3 Aa3 AA- AA-
6
A1
A1
A+
A+
7 A2 A2 A A
8
A3
A3
A-
A-
9 Baa1 Baa1 BBB+ BBB+
10
Baa2
Baa2
BBB
BBB
11
Baa3
Baa3
BBB-
BBB-
12
Ba1
Ba1
BB+
BB+
13
Ba2
Ba2
BB
BB
14
Ba3
Ba3
BB-
BB-
15
B1
B1
B+
B+
16
B2
B2
B
B
17
B3
B3
B-
B-
18
Caa1
Caa1
CCC+
CCC+
19
Caa2
Caa2
CCC
CCC
20 Caa3 Caa3 CCC- CCC-
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 27
Numeric Value Index Rating Moody Rating S&P Rating Fitch Rating
21
Ca
Ca
CC
CC
22
C
C
C
C
23
D
D
D
D
24
NR
NR
NR
NR
Note: S&P and Fitch used AAA+ to distinguish between US government-backed bonds and other explicit
AAA rated securities. The AAA+ rating was originally assigned a numeric value of 1, but has been retired in
2005.
Defaulted Securities
For index purposes, a security is considered to be in default if it missed a scheduled interest or
principal payment, has an index rating of “D” based on the indices’ credit quality methodology
or is trading flat. Defaulted bonds from corporate issuers are not eligible for Bloomberg Indices,
such as the US High Yield Index. Once a corporate bond is identified as in default from an index
standpoint, its accrued interest is set to zero, reversing out any accrual posted since the last
coupon payment, and it will have a negative coupon return. The bond continues to be priced in
the Returns Universe until month-end, at which time it will exit the index. When securities
default, index users will see all analytics, such as duration and spread, set to zero.
In the case of missed payments on treasury and sovereign debt issued by central governments,
debt is often restructured through a revision to the debt terms agreed upon by the government
and bond holders. Due to the increased probability that sovereign debt will come out of default
through restructuring or an exchange, Bloomberg allows defaulted sovereign bonds to remain
eligible for indices, such as the EM USD Aggregate Index.
For US municipals, a bond is considered to be in default if an issuer misses a principal and/ or
an interest payment.
Amount Outstanding
The amount outstanding or par value of a bond determines not only the notional balance on
which an issuer pays interest, but the amount of principal to be repaid by an issuer at the end of
a bond’s term. Par amount outstanding is seen as a measure of relative liquidity and as a proxy
of the float available for investors to purchase, with larger bonds viewed as more accessible
than smaller ones. For purposes of inclusion, Bloomberg Indices have a minimum amount
outstanding rule that is applied on a security-level basis. This is sometimes referred to as a
minimum “liquidity” rule.
The minimum amount outstanding size for the Global Aggregate Index, US Aggregate Index
and EM Local Currency Government Index are the same.
40
Different minimums are used for the
High Yield, Inflation-Linked, EM Hard Currency and Municipal Index families.
Minimum market size at the country level is also a consideration for flagship inflation-linked
(“WGILB”) and EM local currency indices, but not a consideration for other broad-based indices,
such as the US Aggregate or Global Aggregate Indices. Additionally, no minimum issuer size is
applied to corporate or government-related issuers in standard benchmark indices.
41
Local currency minimums are
based on market-specific
issuance and benchmark issue
sizes, and a comparison of
Local Currency Minimums
Global Aggregate and EM Local Currency Minimum Issue Sizes
Effective April 2013, Bloomberg Indices use fixed minimum issue sizes for each local currency
bond market.
42
For each currency included in the Global Aggregate and EM Local Currency
Government Index families, local currency minimums are established based on a number of
factors, including market-specific issuance patterns and benchmark issuance sizes, and a
40
US Aggregate minimum amount outstanding was increased to match that of Global Aggregate Index on April 1, 2017.
41
Prior to April 2013, hard currency emerging market corporate bond issuers were subject to a USD1bn minimum issuer size constraint.
42
Prior to April 2013, local currency minimums were set for non-G4 currencies by converting each currency into either USD, GBP, EUR or JPY, based on region, using
exchange rates as of the last day of November. The annual process set a fixed minimum par amount outstanding for each bond in its local currency that would remain in
effect for the upcoming year starting on January 1. The fixed local currency minimums would then be reset the following November. The switch to local currency
minimums eliminated annual turnover caused by annual resets of G4 pegs and set new appropriate thresholds for markets where benchmark issuance was lower or
higher than current G4 equivalents.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 28
thresholds across markets to
ensure similar size standards
comparison of existing minimum thresholds across markets to ensure similar size standards are
applied. The local currency minimums are reviewed on an annual basis through Bloomberg’s
formal governance process to ensure an accurate representation of each market. Figure 8 lists
minimum amounts outstanding for the Bloomberg Indices.
43
Rules for Indices with Higher Minimum Issue Sizes
Higher liquidity versions of the Global Aggregate and EM Local Currency Government Indices
use adjusted local currency minimums for each currency that are scaled up proportionally to the
same desired percentage increase. This scaling factor is determined by dividing the new
desired minimum for a specific currency by its current Global Aggregate minimum, which is
then applied to all currencies eligible for the benchmark.
For example, setting a USD or EUR minimum issue size of 500mn represents a 2/3 increase over
their Global Aggregate minimum issue size of 300mn. This higher liquidity threshold is then
applied proportionally to all other Global Aggregate currency minimums, reflecting the same
percentage increase from 300mn to 500mn. The adjusted JPY minimum in this example would
be increased to JPY58.3bn from its current JPY35bn.
Investors who prefer market-specific local currency minimums that are not scaled proportionally
across the entire benchmark may do so in a customized index.
Figure 8
Fixed Local Currency Minimums for Bloomberg Indices
Region Currency
Global Aggregate/Global
Treasury/EM Local Currency
Minimum (000s)
Inflation-Linked
Minimum (000s)
High Yield Corporate
Minimum (000s)
Americas
Global Aggregate
Eligible
USD
300,000*
500,000
150,000
CAD
150,000**
600,000
-
MXN
10,000,000
300,000 (UDI)
-
COP 1,000,000,000 1,000,000 (UVR) -
PEN
1,000,000
-
-
CLP 100,000,000 1,000 (UF) -
EM Local Currency
Eligible
BRL 1,000,000 400,000 -
EMEA
Global Aggregate
Eligible
CHF
300,000
-
100,000
CZK
10,000,000
-
-
DKK
2,000,000
5,000,000
-
EUR
300,000
500,000
100,000
GBP
200,000
300,000
50,000
HUF
200,000,000
-
-
ILS
2,000,000
1,500,000
-
NOK
2,000,000
-
500,000
PLN
2,000,000
500,000
-
RON
1,000,000
-
-
RUB
20,000,000
-
-
SEK
2,500,000
4,000,000
1,000,000
EM Local Currency
Eligible
EGP 3,000,000 - -
HRK
3,000,000
-
-
NGN 100,000,000 - -
TRY
2,000,000
500,000
-
ZAR 2,000,000 400,000 -
Asia
Global Aggregate
Eligible
AUD
300,000
700,000
-
CNY 5,000,000 - -
HKD
2,000,000
-
-
IDR
2,000,000,000
-
-
JPY
35,000,000
50,000,000
-
KRW
500,000,000
500,000,000
-
MYR
2,000,000
-
-
43
Effective April 1, 2017, the tranche size minimum for ABS and CMBS securities was lowered to USD25mn in the Global Aggregate. US MBS pool aggregates must have
at least USD1bn amount outstanding to be eligible for the US Aggregate and Global Aggregate Indices, effective April 1, 2014.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 29
Region Currency
Global Aggregate/Global
Treasury/EM Local Currency
Minimum (000s)
Inflation-Linked
Minimum (000s)
High Yield Corporate
Minimum (000s)
NZD
500,000
1,000,000
-
SGD
500,000
-
-
THB
10,000,000
20,000,000
-
EM Local Currency
Eligible
CNH
1,000,000
-
-
INR
25,000,000
-
-
PHP 20,000,000 - -
TWD
15,000,000
-
-
* The minimum for MBS generics is USD1bn as of April 2014.
** Canadian Aggregate minimum amount outstanding was lowered from CAD300mn to CAD150mn effective August 1, 2018.
Inflation-Linked Indices
The minimum issue size for inflation-linked government bonds in developed markets is higher
than their nominal counterparts in the Global Treasury Universal Index and slightly lower for
emerging markets (Figure 8). For most developed markets, actual issue sizes of index-eligible
government debt are substantially higher than the index minimums.
US Aggregate Minimum Issue Sizes
US Aggregate minimum issue sizes have evolved to reflect the growth and size of the USD-
denominated bond market and benchmark issuance sizes (Figure 9).
● The US Aggregate Index has a minimum issue size of USD300mn for government, credit
and covered bonds (as of April 1, 2017).
● For MBS securities, the minimum generic size in the US Aggregate is USD1bn as of April
2014 (previously, the minimum matched the overall minimum of the US Aggregate).
44
● For ABS and CMBS securities, the original deal size minimum is USD500mn and the eligible
tranche size minimum is USD25mn. CMBS securities also must be part of a deal that has at
least USD300mn currently outstanding.
45
Figure 9
Evolution of US Aggregate Minimum Issue Size Rule (in USD)
Date Change to US Aggregate Minimum Issue Size
January 1973
Inception of US Government and US Corporate Indices with 1mn minimum.
January 1986
Inception of US Aggregate Index with 1mn minimum.
April 1988
Minimum raised from 1mn to 25mn.
January 1990
Minimum raised from 25mn to 100mn for government bonds only.
January 1992
Non-government minimum raised from 25mn to 50mn.
January 1994
Non-government minimum raised from 50mn to 100mn.
July 1999
Minimum raised from 100mn to 150mn for all sectors.
October 2003
Minimum raised from 150mn to 200mn.
July 2004
Minimum raised from 200mn to 250mn.
April 2014
MBS minimum raised from 250mn to 1bn, non-MBS remains at 250mn.
April 2017 Minimum raised from 250mn to 300mn for non-securitized bonds.
Other Bloomberg Flagship Indices
High Yield Indices
Issue sizes for the high yield market are generally lower than investment grade issue sizes, and
the minimums for these benchmarks reflect that.
44
As of June 1, 2017, Hybrid ARMs were removed from the US Aggregate and retired as a stand-alone index. The US Aggregate in its entirety is included in the Global
Aggregate Index.
45
The Bloomberg Indices also offer broader CMBS indices that have no minimum tranche size rule and apply only original and current deal size constraints.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 30
● For the US High Yield Corporate Index, the minimum issue size is USD150mn.
● For the Pan-European High Yield Index, the minimum issue sizes for each eligible currency
are EUR100mn, GBP50mn, CHF100mn, SEK1bn and NOK500mn.
46
EM Hard Currency Indices
For the EM Hard Currency Aggregate Indices, higher minimum issue sizes are used:
USD500mn, EUR500mn and GBP500mn. These are applied to the EM Hard Currency
Aggregate family only.
47
Municipal Indices
The tax-exempt US municipal market has substantially lower issuance sizes than the taxable
bond market. The minimum issue size for the flagship Bloomberg US Municipal Index is
USD7mn, and bonds must be issued as part of a transaction of at least USD75mn. For the High
Yield Municipal Index, the minimum issue size is USD3mn, and bonds must be issued as part of
a transaction of at least USD20mn.
Additional market size
minimums are used for EM
Local Currency Government
and WGILB Indices
Minimum Market Size
For Bloomberg EM Local Currency Government and World Government Inflation-Linked
Indices, eligible local currency markets are also subject to minimum market size requirements
for index inclusion based on the gross amount outstanding of debt.
● To be considered for inclusion in the EM Local Currency Government Index, a market must
have at least USD5bn equivalent in nominal, fixed-rate local currency debt at the time of the
annual review. Additional reviews of market investability and accessibility are conducted,
making this rule a necessary but not sufficient condition for inclusion.
● To be considered for inclusion in the World Government Inflation-Linked Bond Index, a
market must be in excess of USD4bn equivalent as of the quarterly review date (end of
quarter). Markets and eligible bonds must also meet all other index inclusion criteria to be
added. The threshold for existing markets is lowered to USD2bn to prevent unnecessary
turnover due to short-term fluctuations in exchange rates or issuance. The existing market
minimum is assessed on an annual basis.
Federal Reserve purchases
and sales of nominal and
inflation-linked US Treasuries
are reflected in flagship
indices
Float Adjustments to Amount Outstanding
US Treasuries
Federal Reserve purchases and sales of nominal and inflation-linked US Treasuries in open
market operations are adjusted in the Bloomberg flagship US Aggregate, Global Treasury and
Series-L US TIPS Indices using data made publicly available on the Federal Reserve Bank of New
York website.
48
These reports are released weekly by the Fed, usually Thursdays around
4:30pm New York time.
Adjustments to each security’s amount outstanding are made in the Projected Universe for
government purchases and sales for the Federal Reserve SOMA (System Open Market Account)
on a weekly basis, typically on Fridays.
49
When US Treasury nominal or inflation-linked bonds
are issued or reopened, the initial par amount outstanding that enters the Projected Universe is
reduced for any issuance bought by the Federal Reserve at auction.
50
46
Prior to 2014, the Pan-European HY minimums were set as one-third of Global Aggregate minimums for each eligible currency.
47
Bonds with lower issue sizes with an EM country of risk may still qualify for other Global Aggregate sub-components such as the US Aggregate, Eurodollar or 144A
Indices.
48
https://www.newyorkfed.org/markets/soma/sysopen_accholdings.html.
49
Prior to May 2009, when the US Treasury increased the scale and scope of purchases in the open market for SOMA accounts, float adjustments were made on a
quarterly basis using the Treasury Quarterly Bulletin, which is published with a 3-month lag.
50
Series-B inflation-linked indices do not adjust the notional amount outstanding of US TIPS for SOMA holdings. The US TIPS component of the Series-B WGILB Index
uses the full amount outstanding to determine index weights and does not adjust for Federal Reserve or government holdings. Therefore, the amount outstanding of
TIPS in the Series-L US TIPS Index may be less than the amount outstanding of the same bond in the WGILB Index if any part of the issue was purchased by the Federal
Reserve.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 31
Float Adjustments for Other Markets
Bloomberg offers a series of Float-Adjusted Indices that adjust the par amount outstanding for
central government holdings of other asset classes.
51
The US Aggregate Float-Adjusted Index
adjusts for US Federal Reserve holdings of US MBS pass-throughs and US agency bonds, in
addition to Treasuries. The Float-Adjusted Pan-European Aggregate adjusts the amount
outstanding of Gilts for Bank of England purchases, and the Float-Adjusted Asian-Pacific
Aggregate Index adjusts JGB par amount outstanding for Bank of Japan purchases. These
adjustments to each security’s amount outstanding are made on a monthly basis in the
Projected Universe,
52
and are reflected in the Returns Universe in the following month.
Other Amount Outstanding Eligibility Rules
Called Securities
Securities that are fully called exit the index at their call price, and the entire par amount
outstanding enters the Returns Universe as cash. In the case of partial calls, an adjustment to the
amount outstanding is made to reflect the current debt outstanding, and the bond remains in
the index so long as all index inclusion rules, including the minimum amount outstanding, are
met.
Sinkable Bonds
For securities with a sinking fund feature, a paydown return will be calculated for months in
which a sinking payment is made, and the outstanding amount of the bond will be adjusted
accordingly.
53
Agency MBS Prepayments
As principal is paid down, US MBS pass-through generics show a decrease in par amount
outstanding, which is reflected on the 16th business day of each month within the indices. A
paydown return is estimated for MBS generics on the first business day of each month using the
prior month’s paydown data and then updated on the 16th business day to reflect actual
prepayments. Though a paydown return is estimated at the beginning of the month and then
revised later, adjustments to amount outstanding are made only once per month, on the 16th
business day. Changes to amount outstanding will generally not cause generics to exit the
index, as paydowns are often offset by new monthly production and generics rarely fall below
the index minimum liquidity. Pan-European and Asian-Pacific mortgages eligible for Bloomberg
Indices do not use the same US MBS generic cohort paydown convention for estimating
prepayments.
Pay-in-Kind Securities
Payment-in-Kind (PIK) securities pay interest in the form of additional bonds.
54
The amount
outstanding for a PIK bond will be increased by the amount of the additional bonds distributed
to investors by the issuer, and a coupon return will be recognized in the month of payment.
Coupon does not accrue for these bonds in other months.
Maturity
Most flagship Bloomberg Aggregate, High Yield, Inflation-Linked and Emerging Markets
Indices have a minimum remaining time to maturity
55
of one year, though other indices are
available that may include bonds with a maturity less than one year. Within securitized indices,
an average life or weighted average maturity is calculated for each security and used for the
maturity minimum. For sub-indices, Bloomberg will generally use the lower bound when setting
51
Central bank purchases of these securities are reflected in the Float Adjusted Indices.
52
The monthly float adjustments are reflected in the Projected Universe usually around the 17
th
US business day. All securities use the latest data available at the time
when float adjustments process is done, except for US MBS (which use Fed holdings as of the last Wednesday of the prior month).
53
Excluded from Bloomberg Indices are sinkable local currency Russian OFZ bonds that were index-eligible prior to April 2014, but removed from the indices due to
liquidity reasons.
54
Toggle notes are a derivative of PIK bonds that have an embedded option that allows the issuer to pay the coupon in cash or in additional securities. Both toggle notes
and PIK bonds are eligible for Bloomberg Indices. Bonds that are partial PIK and partial cash pay are excluded.
55
Actual value of time to maturity is calculated based on the day count convention of each bond.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 32
a maturity range. For example, a 1-5 year index will generally include bonds with a maturity of
between 1 and up to, but not including, 5 years as of the index rebalancing date.
Most flagship Bloomberg
Indices have a minimum time
to maturity, or average life for
securitized bonds, of one year
Index Eligibility and Classification by Maturity
Bloomberg uses time to final maturity to determine index inclusion and classify bonds by their
remaining term. There is no limit on final maturity as long as the bond has a stated final
maturity. Bonds with 50- and 100-year maturities may be included in flagship indices, but fixed-
rate perpetuals are not eligible.
● For most government, corporate and covered securities, maturity is calculated on a daily
basis as the difference between the stated final maturity date and the current index
settlement date of a bond.
● ABS and CMBS securities must have a remaining average life of at least one year, while MBS
must have a weighted average maturity (WAM) of at least one year.
56
● Fixed-to-floating rate perpetuals and fixed-to-variable bonds are included in the indices until
one year prior to their conversion to floating-rate or coupon reset. Their maturity date within
the indices for purposes of maturity calculation is set to the conversion date.
For widely used benchmark indices, the index flag will automatically be updated on the first day
of the month for securities dropping out of the Projected Universe due to their falling below the
1-year minimum at some point during the month (based on their stated maturity date). This
allows the Projected Universe forecast to be as accurate as possible during the month by
excluding bonds that may have not yet dropped below one year on the first day of the month,
rather than waiting until the exact day the bond will drop below 1 year to maturity.
57
Sub-indices by maturity are
inclusive of lower bounds
Sub-Indices by Maturity
For sub-indices by maturity, Bloomberg will generally use the lower bound when setting a
maturity range. Bloomberg defines “intermediate” indices as consisting of securities with
remaining maturities between 1 year and up to, but not including, 10 years. “Long” indices
consist of securities with 10 or more years to maturity. Generally, indices referred to as “short”
contain bonds with less than 1 year to maturity.
Country
When evaluating portfolio risk, fixed income investors will often look at the country or
geographic region of an issuer’s risk as a separate consideration from the currency of the
bond’s principal and interest payments. This determination is used by investors when looking at
macro allocations, risk budgets and concentrations across markets, as well as when evaluating
the relative value of non-government bonds over comparable government bonds within the
same market. In particular, country classification is important for investors who make formal
distinctions between developed and emerging markets in their portfolios.
Country designation in
Bloomberg Indices represents
country of risk
Country Classification
Bloomberg Indices use a “country of risk” approach to determine country classifications.
58
For
government, government-related and corporate bond issuers that are operating, domiciled or
concentrated within a single market, country classification is generally a straightforward
exercise. For corporates or other issuers with geographically diverse operations, complex
ownership structures, a presence in multiple locations
59
or other risk exposures that span
multiple markets, country classifications are more challenging. The primary criteria for
classifying country of risk are:
56
MBS analytics are calculated assuming same-day settlement.
57
This dynamic will not occur for maturity-based sub-indices, where a lower or upper bound is something other than 1 year. Index flags are calculated on broad flagship
benchmarks only.
58
Effective end of September 2019, the Indices’ country of risk is sourced from Bloomberg Country of Risk (CoR) field. However, prior to September 2019, the two
country of risk designations may have differed.
59
Not all bonds under a ticker will have the same country of risk. The indices’ framework allows for wholly owned subsidiaries to have a different country of risk than the
parent company. For example, Credit Suisse USA Inc. is a wholly owned subsidiary of Credit Suisse AG. The former carries a US country of risk, while the latter carries a
Swiss country of risk; this is determined based on where the subsidiary operates in relation to the parent entity.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 33
● Where a bond’s guarantee comes from if the issuer is backed by a government or parent
corporate entity.
● Where the largest source of revenue, operations or cash flows is generated by the issuer.
● Where an issuer is headquartered or its centralized decision-making occurs.
60
Additional criteria may be used in the evaluation of a bond’s country of risk, including, but not
limited to:
● Where the issuer is incorporated, legally domiciled
61
and regulated.
● Where an issuer’s stock is listed and traded.
● Where existing issuers within the index that are similarly structured or organized are
classified.
Even with established criteria,
country classification can
present challenges and can
change over time
Initial Issuer Country Assignment and Review
For certain large and complex issuers, cases can be made for a number of different country
classifications using the criteria outlined above. Furthermore, even with established criteria,
country classifications can change over time due to various factors. A few examples of recent
country reassignments that illustrate some of these complexities include:
● Petroleos Mexicanos (“PEMEX”), the Mexican state-owned petroleum company, issued three
securities guaranteed by the Export-Import Bank of the United States in June 2012. To reflect
properly the guarantee these bonds hold from a US government agency, their country of
risk was updated from Mexico to the United States. As result, the bonds fell out of the US
Credit Index and moved to the US Government Index, which includes US agencies and US
Treasuries. Inclusion in the flagship US Aggregate was not affected; however, the bonds no
longer qualified for the EM USD Aggregate Index since their country of risk was no longer
classified as an emerging market. The credit rating was also updated from the PEMEX issuer
rating to the US government rating.
● In March 2013, Nexen, a publicly traded Canadian energy company, was acquired by the
Chinese state-owned entity CNOOC Ltd, with CNOOC guaranteeing Nexen’s outstanding
debt. As a result of the acquisition and CNOOC guarantee, the country of risk for the Nexen
bonds was changed from Canada to China. Additionally, the sector of index-eligible Nexen
bonds was updated from Industrial > Energy to Government-Related > Agencies and the
ticker was updated from NXYCN to CNOOC. As a result, four Nexen issues became eligible
for the USD EM Aggregate Index. Eligibility within the US Aggregate and US Credit Indices
was not affected.
● In September 2012, the country of risk for NII Capital Corporation was updated to Brazil in
the benchmark indices to more accurately reflect the company’s operational exposure,
revenue sources and LATAM credit risk. Due to this change, three bonds exited the US High
Yield Index and entered the EM USD Aggregate Index.
Index users may challenge a particular issuer’s country of risk and request a review if they feel
an alternative country assignment may be more appropriate for a given bond or issuer.
Bloomberg looks to maintain an open dialogue with index users on country of risk
classifications within the indices given the effect such delineations can have on portfolio
allocations and management.
An annually reviewed fixed list
of emerging market countries
is used to define country
eligibility in flagship EM hard
Bloomberg Indices’ Emerging Markets Country List
In addition to being a requirement for inclusion in Bloomberg dedicated EM Indices, an
emerging markets country designation also affects inclusion in high yield indices, which exclude
issuers with an EM country of risk as a rule. Broad-based investment grade indices, such as the
60
This is a fundamental consideration for multi-national corporations and entities that have operations spanning multiple regions (e.g., metals and mining companies).
61
In many cases, the country of risk and country of legal domicile can be one and the same. In other cases, however, the two may be different based on the issuer’s
operations, relationship with parent company, subsidiaries, or legal profile. For example, the issuer’s country of risk can match the country of the issuer’s parent instead
of its legal domicile when the bond is issued by a subsidiary that is guaranteed by the parent. In other cases, the country of a non-guaranteed subsidiary or other
offshore structure may depend on where the economic risk is coming from, rather than the country of the subsidiary’s legal domicile or parent.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 34
currency, local currency and
inflation-linked benchmarks
US Aggregate, do not have a country of risk criterion and have crossover eligibility with the EM
Indices provided a security meets the rules of both.
In 2013, the indices moved to an annually reviewed fixed list of emerging market countries to
define country eligibility in flagship EM hard currency, local currency and inflation-linked
benchmarks.
62
Criteria for inclusion in the EM country list include:
● World Bank income group classifications of low/middle income OR International Monetary
Fund (“IMF”) classification as a non-advanced country.
● Additional factors that bond investors use to classify emerging markets, such as investability
concerns, the presence of capital controls and/or geographic considerations. As of
December 2013, 4 additional markets are included in the indices’ EM country list: Czech
Republic, Israel, South Korea and Taiwan.
Figures 10-12 show the Bloomberg Indices’ EM country inclusion list by region.
Offshore entities
Only government-related issues from offshore entities are considered to be emerging markets.
Corporates of these entities are not EM-eligible but do qualify for Bloomberg high yield indices,
provided they meet all other index rules. Countries considered to be offshore entities as part of
this rule are Aruba, Antigua and Barbuda, Bahamas, Bermuda, Cayman Islands, Seychelles, St.
Kitts and Nevis, St. Martin (France), and St. Pierre and Miquelon.
Figure 10
Asia EM Country Inclusion List
3
rd
Party Classifications
Sov Ratings
Index Inclusion
Sub Region
Current
Coverage
Country
World Bank
Income Group
IMF
Classification
Foreign Local
EM Hard
Ccy
EM
Sov
EM Local
Govt
EM Local
Govt Univ
EM
Linker
East Asia &
Pacific
Index-Eligible
Debt
China
Middle Upper
Non-advanced
A1
A1
√
√
√
√
Cambodia
Middle Lower
Non-advanced
B2
B2
√
Indonesia
Middle Lower
Non-advanced
Baa2
Baa2
√
√
√
√
Malaysia
Middle Upper
Non-advanced
A3
A3
√
√
√
√
Mongolia
Middle Lower
Non-advanced
B2
B2
√
√
Papua New Guinea Middle Lower Non-advanced B3 B3 √ √
Philippines
Middle Lower
Non-advanced
Baa2
Baa2
√
√
√
√
South Korea
High
Advanced
Aa2
Aa2
√
√
√
√
√
Thailand
Middle Upper
Non-advanced
Baa1
Baa1
√
√
√
√
Vietnam
Middle Lower
Non-advanced
Ba2
Ba2
√
√
No Index-
Eligible Debt
American Samoa
Middle Upper
Non-advanced
NR
NR
Brunei High Non-advanced NR NR
Fiji
Middle Upper
Non-advanced
B1
B1
French Polynesia
High
Non-advanced
NR
NR
Guam
High
Non-advanced
NR
NR
Kiribati
Middle Lower
Non-advanced
NR
NR
Lao PDR
Middle Lower
Non-advanced
NR
NR
Marshall Islands Middle Upper Non-advanced NR NR
Micronesia
Middle Lower
Non-advanced
NR
NR
Myanmar
Middle Lower
Non-advanced
NR
NR
New Caledonia
High
Non-advanced
NR
NR
North Korea
Low
Non-advanced
NR
NR
N. Mariana Islands
High
Non-advanced
NR
NR
Palau High Non-advanced NR NR
Samoa
Middle Lower
Non-advanced
NR
NR
Solomon Islands
Middle Lower
Non-advanced
NR
NR
Timor-Leste
Middle Lower
Non-advanced
NR
NR
Tonga
Middle Upper
Non-advanced
NR
NR
Tuvalu
Middle Upper
Non-advanced
NR
NR
Vanuatu
Middle Lower
Non-advanced
NR
NR
South Asia
India
Middle Lower
Non-advanced
Baa3
Baa3
√
√
62
Prior to April 2013, a country was considered an emerging market if it had a long term foreign currency sovereign rating of Baa1 or less, based on the middle rating of
Moody’s, S&P and Fitch. Under this definition, eurozone countries were excluded as a rule; the current EM definition for Bloomberg Indices does not include this explicit
exclusion for eurozone countries.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 35
3
rd
Party Classifications
Sov Ratings
Index Inclusion
Sub Region
Current
Coverage
Country
World Bank
Income Group
IMF
Classification
Foreign Local
EM Hard
Ccy
EM
Sov
EM Local
Govt
EM Local
Govt Univ
EM
Linker
Index-Eligible
Debt
Pakistan
Middle Lower
Non-advanced
B3
B3
√
√
Sri Lanka
Middle Lower
Non-advanced
Caa1
Caa2
√
√
Taiwan High Advanced Aa3 Aa3 √
√
No Index-
Eligible Debt
Afghanistan
Low
Non-advanced
NR
NR
Bangladesh
Middle Lower
Non-advanced
Ba3
Ba3
Bhutan
Middle Lower
Non-advanced
NR
NR
Maldives
Middle Upper
Non-advanced
Caa1
Caa2
Nepal
Middle Lower
Non-advanced
NR
NR
Data are as of August 2021. Source: World Bank, IMF, Bloomberg
Figure 11
EMEA EM Country Inclusion List
3rd Party Classifications
Sov Ratings
Index Inclusion
Sub Region
Current
Coverage
Country
World Bank
Income Group
IMF
Classification
Foreign Local
EM Hard
Ccy
EM
Sov
EM Local
Govt
EM Local
Govt Univ
EM
Linker
Europe &
Central Asia
Index-
Eligible
Debt
Armenia
Middle Upper
Non-advanced
B1
B1
√
√
Azerbaijan
Middle Upper
Non-advanced
Ba1
Ba1
√
√
Belarus
Middle Upper
Non-advanced
B3
B2
√
√
Croatia
High
Non-advanced
Baa3
Baa3
√
√
√
Czech Republic High Advanced Aa3 Aa3 √ √
Georgia
Middle Upper
Non-advanced
Ba2
Ba2
√
√
Hungary
High
Non-advanced
Baa2
Baa2
√
√
√
√
Kazakhstan
Middle Upper
Non-advanced
Baa2
Baa2
√
√
Poland
High
Non-advanced
A3
A2
√
√
√
√
√
Romania
Middle Upper
Non-advanced
Baa3
Baa3
√
√
√
√
Russia Middle Upper Non-advanced Baa3 Baa2 √ √ √ √ √
Serbia
Middle Upper
Non-advanced
Ba1
Ba1
√
√
Tajikistan
Middle Lower
Non-advanced
B3
B3
√
√
Turkey
Middle Upper
Non-advanced
B1
Ba3
√
√
√
√
√
Ukraine
Middle Lower
Non-advanced
B2
B2
√
√
Uzbekistan
Middle Lower
Non-advanced
B1
Ba3
√
√
No Index-
Eligible Debt
Albania
Middle Upper
Non-advanced
B1
B1
Bosnia and Hrz
Middle Upper
Non-advanced
B3
B3
Bulgaria
Middle Upper
Non-advanced
Baa2
Baa2
Kosovo
Middle Upper
Non-advanced
NR
NR
Kyrgyzstan
Middle Lower
Non-advanced
B2
B2
Macedonia
Middle Upper
Non-advanced
Ba3
Ba3
Moldova
Middle Upper
Non-advanced
B3
B3
Montenegro
Middle Upper
Non-advanced
B2
B2
Turkmenistan
Middle Upper
Non-advanced
NR
NR
Middle East
& North
Africa
Index-
Eligible
Debt
Bahrain
High
Non-advanced
B1
B1
√
√
Egypt
Middle Lower
Non-advanced
B2
B2
√
√
√
Iraq
Middle Upper
Non-advanced
Caa1
Caa1
√
√
Israel
High
Advanced
A1
A1
√
√
√
√
√
Jordan
Middle Upper
Non-advanced
B1
B1
√
√
Kuwait
High
Non-advanced
A1
A1
√
√
Lebanon
Middle Upper
Non-advanced
D
Ca
√
√
Morocco
Middle Lower
Non-advanced
Ba1
Ba1
√
√
Oman
High
Non-advanced
Ba3
Ba3
√
√
Qatar
High
Non-advanced
Aa3
Aa3
√
√
Saudi Arabia High Non-advanced A2 A2 √ √
Tunisia
Middle Lower
Non-advanced
B3
B3
√
√
United Arab Emirates
High
Non-advanced
Aa2
Aa2
√
√
No Index-
Eligible Debt
Algeria
Middle Lower
Non-advanced
NR
NR
Djibouti
Middle Lower
Non-advanced
NR
NR
Iran
Middle Lower
Non-advanced
NR
NR
Libya Middle Upper Non-advanced NR NR
Syria
Low
Non-advanced
NR
NR
West Bank and Gaza
Middle Lower
Non-advanced
NR
NR
Yemen
Low
Non-advanced
NR
NR
Sub Saharan
Africa
Index-
Eligible
Debt
Angola
Middle Lower
Non-advanced
Caa1
Caa1
√
√
Ethiopia
Low
Non-advanced
Caa1
Caa1
√
√
Gabon Middle Upper Non-advanced Caa2 Caa2 √ √
Ghana
Middle Lower
Non-advanced
B3
B3
√
√
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 36
3rd Party Classifications
Sov Ratings
Index Inclusion
Sub Region
Current
Coverage
Country
World Bank
Income Group
IMF
Classification
Foreign Local
EM Hard
Ccy
EM
Sov
EM Local
Govt
EM Local
Govt Univ
EM
Linker
Ivory Coast
Middle Lower
Non-advanced
Ba3
Ba3
√
√
Kenya
Middle Lower
Non-advanced
B2
B2
√
√
Mozambique Low Non-advanced Caa2 Caa2 √ √
Namibia
Middle Upper
Non-advanced
Ba3
Ba3
√
√
Nigeria
Middle Lower
Non-advanced
B2
B2
√
√
√
Senegal
Middle Lower
Non-advanced
B1
B1
√
√
South Africa
Middle Upper
Non-advanced
Ba3
Ba2
√
√
√
√
√
Tanzania
Middle Lower
Non-advanced
B2
B2
√
Togo Low Non-advanced B3 B3 √
Zambia
Middle Lower
Non-advanced
C
Caa3
√
√
No Index-
Eligible Debt
Benin
Middle Lower
Non-advanced
B1
B1
Botswana
Middle Upper
Non-advanced
Baa1
Baa1
Burkina Faso
Low
Non-advanced
B2
B2
Burundi
Low
Non-advanced
NR
NR
Cameroon Middle Lower Non-advanced B2 B2
Cape Verde
Middle Lower
Non-advanced
B3
B3
Central African Rep
Low
Non-advanced
NR
NR
Chad
Low
Non-advanced
NR
NR
Comoros
Middle Lower
Non-advanced
NR
NR
Congo, Dem. Rep.
Low
Non-advanced
Caa1
Caa1
Congo, Rep. Middle Lower Non-advanced Caa2 Caa2
Equatorial Guinea
Middle Upper
Non-advanced
NR
NR
Eritrea
Low
Non-advanced
NR
NR
Gambia
Low
Non-advanced
NR
NR
Guinea
Low
Non-advanced
NR
NR
Guinea-Bissau
Low
Non-advanced
NR
NR
Lesotho Middle Lower Non-advanced NR B2
Liberia
Low
Non-advanced
NR
NR
Madagascar
Low
Non-advanced
NR
NR
Malawi
Low
Non-advanced
NR
NR
Mali
Low
Non-advanced
Caa1
Caa1
Mauritania
Middle Lower
Non-advanced
NR
NR
Mauritius Middle Upper Non-advanced Baa2 Baa2
Niger Low Non-advanced B3 B3
Rwanda
Low
Non-advanced
B1
B1
São Tomé and Principe
Middle Lower
Non-advanced
NR
NR
Seychelles
High
Non-advanced
B2
B2
Sierra Leone
Low
Non-advanced
NR
NR
Somalia
Low
Non-advanced
NR
NR
South Sudan
Low
Non-advanced
NR
NR
Sudan
Low
Non-advanced
NR
NR
Swaziland
Middle Lower
Non-advanced
NR
NR
Uganda
Low
Non-advanced
B2
B2
Zimbabwe
Middle Lower
Non-advanced
NR
NR
Data are as of August 2021. Source: World Bank, IMF, Bloomberg
Figure 12
Latin America EM Country Inclusion
3rd Party Classifications
Sov Ratings
Index Inclusion
Sub Region
Current
Coverage
Country
World Bank
Income Group
IMF
Classification
Foreign
Local
EM HC
Agg
EM HC
Sov
EM
Local
Govt
EM Local
Govt Univ
EM
Linker
South
America
Index-
Eligible
Debt
Argentina
Middle Upper
Non-advanced
Ca
Caa2
√
√
√
Bolivia
Middle Lower
Non-advanced
B2
B2
√
√
Brazil
Middle Upper
Non-advanced
Ba3
Ba3
√
√
√
√
√
Chile
High
Non-advanced
A2
A1
√
√
√
√
√
Colombia
Middle Upper
Non-advanced
Ba1
Baa3
√
√
√
√
√
Ecuador
Middle Upper
Non-advanced
B3
B3
√
√
Paraguay
Middle Upper
Non-advanced
Ba1
Ba1
√
√
Peru
Middle Upper
Non-advanced
Baa1
A3
√
√
√
√
Suriname Middle Upper Non-advanced D D √ √
Uruguay
High
Non-advanced
Baa2
Baa2
√
√
No Index-
Eligible Debt
Guyana Middle Upper Non-Advanced NR NR
Venezuela N/A Non-Advanced D Caa3
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 37
3rd Party Classifications
Sov Ratings
Index Inclusion
Sub Region
Current
Coverage
Country
World Bank
Income Group
IMF
Classification
Foreign
Local
EM HC
Agg
EM HC
Sov
EM
Local
Govt
EM Local
Govt Univ
EM
Linker
Central
America &
Caribbean
Index-
Eligible
Debt
Bahamas
High
Non-advanced
Ba3
Ba3
√
√
Belize
Middle Lower
Non-advanced
D
Ca
√
√
Bermuda
High
Non-advanced
A2
A2
√
√
Costa Rica
Middle Upper Non-advanced B2 B2 √ √
Dominican Rep
Middle Upper
Non-advanced
Ba3
Ba3
√
√
El Salvador
Middle Lower
Non-advanced
B3
B3
√
√
Guatemala
Middle Upper
Non-advanced
Ba3
Ba2
√
√
Honduras
Middle Lower
Non-advanced
B1
B1
√
√
Jamaica
Middle Upper Non-advanced B1 B1 √ √
Mexico
Middle Upper
Non-advanced
Baa2
Baa1
√
√
√
√
√
Panama
Middle Upper
Non-advanced
Baa2
Baa3
√
√
Trinidad and Tobago
High
Non-advanced
Ba1
Ba1
√
√
No Index-
Eligible Debt
Antigua and Barbuda High Non-advanced NR NR
Aruba
High
Non-advanced
Ba2
Ba2
Barbados
High
Non-advanced
Caa1
Caa1
Cayman Islands
High
Non-advanced
Aa3
Aa3
Cuba
Middle Upper
Non-advanced
Caa2
Caa2
Curaçao
High Non-advanced Baa3 Baa3
Dominica
Middle Upper
Non-advanced
NR
NR
Grenada
Middle Upper
Non-advanced
NR
NR
Haiti
Middle Lower
Non-advanced
NR
NR
Nicaragua Middle Lower Non-advanced B3 B3
Puerto Rico
High
Advanced
NR
NR
St. Kitts and Nevis
High
Non-advanced
NR
NR
St. Lucia
Middle Upper
Non-advanced
NR
NR
St. Martin
High
Non-advanced
NR
NR
St. Vincent
Middle Upper
Non-advanced
B3
B3
Turks and Caicos
High
Non-advanced
Baa1
Baa1
Virgin Islands (US)
High
Non-advanced
NR
NR
Data are as of August 2021. Source: World Bank, IMF, Bloomberg
Market of Issue
Market of issue is used to identify whether a security is offered to domestic investors only, to
foreign investors only, or globally to both. Placement type identifies whether a bond is publicly
registered (or exempt from such registration) and available broadly to institutional investors or
privately placed to a narrower set of qualified institutional investors. Both attributes are used to
identify securities that may be restricted or unavailable to certain investors and, therefore,
ineligible for benchmark inclusion.
For certain investors, privately placed securities are prohibited investments due to explicit
governance and fiduciary constraints
63
that limit exposure to less liquid securities. Compared
with private placements, publicly registered securities (and those exempt from registration)
require a higher level of disclosure, demand additional reporting requirements, and subject the
issuer to laws of the local jurisdictions in which they are registered to sell a bond. This
transparency will often broaden the appeal of registered securities to a wider set of investors,
including those unable to own private placements. However, depending on the issuer’s
borrowing needs, they may still choose to target investors outside of their local market or issue
priva
te placements. Private placements are excluded from most flagship Aggregate Indices such
as the US Aggregate and Euro Aggregate, but are measured in standalone indices such as the
US 144A Index, which is a subset of the US Universal and Global Aggregate Indices.
63
For example, US investors with fiduciary duties governed by ERISA are generally restricted from owning private placements in their portfolios.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 38
Market of Issue Criteria
For domestic single-currency benchmarks, such as the US Aggregate, market of issue is used to
exclude securities that are offered only to foreign investors. Multi-currency indices, such as the
Global Aggregate, which are agnostic to the domicile of the investor, will often be more
inclusive of securities that may be offered outside of a domestic market.
US Indices
The US Aggregate Index does not include privately placed securities or bonds that are
marketed or offered only to non-US investors (eurodollar placements). Therefore, the US
Aggregate includes:
● Securities that have a public registration statement filed with the Securities and Exchange
Commission (“SEC”) and are subject to SEC reporting requirements.
64
● Debt that is exempt from registration with the SEC.
65
● Bonds issued under SEC Rule 144A with registration rights to convert into a public issue.
The US Aggregate includes global bonds that are available in domestic and non-domestic
markets. Bonds that are available to non-US investors, including global bonds that may be US
Aggregate eligible and Eurodollar bonds marketed exclusively to non-US investors, are tracked
in a separate Eurodollar Index.
66
US Rule 144A provides an exemption from SEC registration for the resale of previously privately
placed securities. Securities resold under US Rule 144A are restricted and can generally be sold
only to Qualified Institutional Buyers (“QIBs”). Bloomberg Indices make a distinction between
bonds issued under US Rule 144A based on
whether the issuer has the right to register the bond
in the future with the SEC. Private placement credit bonds issued under US Rule 144A that do
not have registration rights are tracked in a separate US 144A Index, which includes bonds with
and without registration rights.
A security with Reg
-S and Rule
144A tranches is treated as one
security in par value to prevent
double
-counting
Bonds with 144A and Regulation-S Tranches
Regulation-S under the US Securities Act of 1933 governs the offering and sale of USD-
denominated bonds outside the United States. Securities are often brought to market with one
tranche that adheres to Regulation-S for non-US investors and one that adheres to US Rule 144A
for US investors. A security with both SEC Regulation-S (“Reg-S”) and SEC Rule 144A tranches is
treated as one security in par value to prevent double-counting within the Bloomberg Indices.
The tranche included in the index is used to represent the issue and comprises the combined
amount outstanding of the 144A and Reg-S tranches.
For non-emerging markets issuers, the 144A tranche is selected to represent an issue with both
144A and Reg-S tranches. For emerging markets issuers, which tranche is selected depends on
whether the issuer has the option to register the bond with the SEC under US Rule 144A:
● If a bond is issued with a 144A and Reg-S tranche and the 144A tranche has registration
rights, Bloomberg will use the 144A tranche as long as the bond is eligible for one of the
investment grade indices (US Aggreg
ate, Eurodollar or 144A Index). In cases where a bond is
eligible for the hard currency emerging markets indices only (e.g., high yield or non-rated
bonds), Bloomberg will use the Reg-S tranche.
● If a bond is issued with a 144A and Reg-S tranche and the 144A tranche does not have
registration rights, the Reg-S tranche is used for index purposes.
If a bond enters the indices as non-EM and then later becomes eligible for an EM index, the
tranche used for index purposes will not change.
67
Broader benchmarks, such as the US
64
If an issue is registered with the SEC and the issuer later deregisters the bond, it will not affect index eligibility.
65
For example, bank debt issued under Rule 3(a)(2) is exempt from registration with the SEC.
66
To be included in the EM USD Aggregate Index and US Universal Index, Eurodollar-only securities were previously subject to a 41-day seasoning rule, which
corresponds to the regulatory waiting period between issuance and when US investors can enter the Eurodollar market. As of July 1, 2013, the seasoning rule was
removed as an inclusion criterion of the EM USD Aggregate Index, but continues to be applied to the US Universal Index, a core plus benchmark used primarily by US-
based investors.
67
For example, 144A Chile bonds that were added to the indices before Chile was added to the EM country list in April 2013 continue to use the 144A tranche for index
purposes. The rule of using of the same tranche when the bond changes from EM to DM (and vice versa) applies to all indices.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 39
Universal and Global Aggregate Indices, do not make the same distinction for market of issue
since they assume that the investor is either an unconstrained core plus user (US Universal) or a
global investor (Global Aggregate) who would regularly invest in these markets. Therefore, USD
-
denominated bonds in the 144A and Eurodollar Indices that are not already in the US Aggregate
will be eligible for these broader benchmarks.
Exchanges
Securities that are originated under US Rule 144A with registration rights and later registered
with the SEC are treated as the same security for index purposes. Once the registered identifier
becomes available, it is used in the index. Typically, index users will use a bond’s ticker, coupon
and maturity date to link the 144A identifier with the new SEC-registered identifier. The only
change they will notice is an update to the identifier and Placement Type; it will not look as
though the 144A bond exited the index and the SEC-registered bond entered it.
Other Regional Aggregate Indices
Rules on public versus private placements apply to other non-US aggregate benchmarks as
well.
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Debt that is offered publicly to domestic investors or globally marketed is aggregate
index eligible, but there is no equivalent distinction for US Rule 144A bonds with registration
rights within Pan-European or Asian-Pacific indices.
Bonds that are marketed primarily to retail investors, even if an institution could buy them, are
excluded from the aggregate indices. Screening for an exclusion of retail bonds and private
placements is an ongoing process that looks at a variety of factors. The first phase o
f the process
is to assess all new bonds that appear eligible for the indices. All bonds are given a score, based
on several factors, including but not limited to:
● Minimum piece or increment
● Number of available price quotes from broker/dealers
● Number of lead managers
● Whether the coupon and issue size are conventional or plain vanilla.
69
If a bond is given a score that is indicative of a retail bond, the issuer is contacted to verify the
nature of the bond. If no confirmation is received from the issuer and the bond does not meet
the requisite score, it is excluded from the index. If new evidence to the contrary comes to light
following the bond’s initial exclusion, it may subsequently be added.
Taxability
Bloomberg index eligibility rules consider a bond’s taxability from both an issuer and an investor
perspective.
From an issuer perspective, taxability of coupon/dividend payments is used to distinguish
between debt and equity and, therefore, whether a security will qualify for Bloomberg fixed
income indices. Interest payments must be made on a pre-
tax basis by the issuer for a security to
be fixed income index eligible. Payments made on an after-tax basis are considered dividends
and the instruments are classified as preferred equity and, therefore, not benchmark index
eligible.
From an investor perspective, Bloomberg distinguishes between tax-exempt securities (notably
the US municipal market) and bonds that are taxable for the end investor. To be eligible for
flagship indices, such as the US Aggregate or Global Aggregate Indices, interest payments must
be fully taxable to the investor. The tax-exempt US municipal bond market is tracked in a
standalone family of indices.
68
E.g. effective December 2019, a security needs to be placed with at least 10 institutional investors at issuance to be referred to as “widely distributed” and to be eligible
for the Canada Aggregate Indices.
69
Retail bonds are often issued with a very specific coupon and/or issue sizes that are typically not round numbers.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 40
Bloomberg does not make any
tax assumptions or adjustments
when calculating flagship index
returns
For flagship indices, Bloomberg does not calculate index returns on a net basis, and published
levels are gross of any applicable taxes (capital gains, withholding, stamp, capital controls, etc.)
to the end investor. Tax liabilities are an investor-specific determination, especially in cases
where cross-country tax treaties, onshore versus offshore investor access and other
considerations vary from fund to fund and from firm to firm.
70
Taxability of Debt versus Equity
From an issuer perspective, interest payments must be made on a gross basis for a security to
be fixed income index eligible. Payments made on a net basis are considered dividends and the
instruments are classified as preferred equity and, therefore, not eligible for fixed income
indices. This distinction arises mainly for hybrid capital securities that have both debt- and
equity-
like characteristics. This rule, therefore, excludes preferred shares that pay a fixed coupon
without a final maturity, dividends-received deduction (“DRD”) securities and qualified dividend
income (“QDI”) securities from the indices.
Taxable versus Tax-Exempt Bonds
Because most US municipal securities are tax-exempt, issuers can borrow at lower rates while
offering investors a tax-equivalent return that may be comparable to a higher coupon taxable
bond. This tax exemption is something that segments the potential investor base, as not all
investors may receive the same tax benefits from this market. Therefore, Bloomberg Indices
make a clear distinction between tax-exempt municipals in standalone municipal indices and
other taxable bonds in flagship indices.
Not all US municipal debt is tax-exempt, and the exclusion of tax-exempt municipals is not an
issuer-
based exclusion. Taxable municipal bonds have been eligible for the US Aggregate Index
since 2003. These securities are classified within the Local Authority sector and qualify for the
US Credit Index.
Build America Bonds (“BAB”)
Taxable municipal securities issued under the Build America Bond program are one type of
taxable security eligible for the US Aggregate Index as long as the issuer opts to receive a direct
subsidy payment from the federal government reimbursing a portion of the in
terest costs. In this
case, Build America Bonds are fully taxable to the investor and treated like other US Aggregate
eligible taxable municipals with respect to inclusion and sector classification. BABs issued with
the tax credit going to the investor are not index eligible.
Calculation of Index Returns
While the discussion of end-
investor tax liabilities has focused on US municipals, global investors
are often subject to taxation in multiple jurisdictions depending on the applicable tax laws in
each market and whether the end investor is domestic or foreign. For all indices (including
Municipal Indices), Bloomberg does not make any tax assumptions or adjustments (withholding
taxes on interest income, capital gains taxes, stamp taxes, etc.) since these are unique to
individual investors based on a variety of factors, including where the investor has local market
operations or reciprocal tax treaties with their home market. Though flagship index returns are
calculated gross of taxes, Bloomberg has published net-of-tax index returns in bespoke indices
upon client request.
Subordination
In the case of default, the capital structure of an issuer’s outstanding debt determines the order
in which creditors are paid back. Holders of debt secured by specified or ring-fenced assets are
generally paid back first, followed by senior unsecured bondholders. Subordinated securities,
70
Net of taxes may be calculated on a customized basis, but net indices account only for withholding taxes.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 41
which rank below secured and senior bonds, generally have a different risk profile than that of
securities with more senior claims on an issuer’s assets; this additional risk is reflected in a
security’s price. Naturally, investors often look at where a bond falls within an issuer’s capital
structure when making investment decisions, with the most important distinction between senior
debt and subordinated debt, including hybrid capital.
Secured Bonds
In the event of a default, holders of secured debt, which is backed by dedicated collateral that
can be sold to repay bondholders, rank highest among an issuer’s creditors, followed by senior
unsecured debt holders. Figure 13 lists subordination classifications for secured credit bonds
within Bloomberg Indices.
Figure 13
Subordination Classifications of Secured Credit Bonds in Bloomberg Indices
Subordination Type Index Code Description
First Mortgage Bond 1STMTG
A security with the first mortgage on the issuer’s property
serving as the bond’s collateral. Comprised primarily of
Electric issuers.
Second Mortgage
Bond
2NDMTG
A bond backed by a mortgage, with the first mortgage
bonds taking priority over the second.
Collateral Lease
Obligation
COLLEAS
A secured utility bond backed by leases on the hard
assets of a utility.
Enhanced Equipment
Trust Certificates
EETC
A type of pass-
through security commonly used in aircraft
finance in the US. In the transaction, a trust certificate is
sold to investors to finance the purchase of an aircraft by
a trust, which then leases the aircraft to the airline, and
the trustee passes payment through the trust to the
investors. Holders of certificates have first claim on those
assets.
First General and
Refunding Mortgage
Bonds
GENREF
A bond secured by a first general mortgage or a
refunding mortgage (a mortgage loan that is refinanced
with another loan).
Senior Debt
Of an issuer’s outstanding bonds, senior unsecured debt is considered lower risk than
subordinated debt. Although senior debt holders must be repaid before other unsecured
creditors in a bankruptcy event, the securities are backed only by the credit of the issuer and its
ability to service the debt.
Senior unsecured credit bonds are assigned a subordination type of Debentures, Notes, Senior,
Senior Debentures or Senior Notes within Bloomberg Indices.
71
Investors looking for a
customized benchmark that includes senior unsecured debt only will generally construct their
index using the aforementioned values of the subordination type data attribute.
Subordinated Debt
Subordinated bonds typically carry lower credit ratings and offer a higher spread than more
senior ranked bonds in the capital structure to compensate investors for the additional risk they
carry. Within the benchmark indices, Bloomberg distinguishes between subordinated bonds or
debentures and capital securities. Subordinated bonds that are not considered capital securities
by Bloomberg are assigned values of Subordinated, Subordinated Debentures, Junior
Subordinated Debentures or Senior Subordinated Debentures in the subordination type
71
Subordination type is a relevant attribute for credit bonds only. Although securitized bonds are assigned a “senior” value, this attribute is not meant to represent where
a specific tranche ranks within a given securitized deal.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 42
attribute. Capital securities, on the other hand, are identified with a subordination type of either
Tier 1, Upper Tier 2, Lower Tier 2 or Capital Credit.
For index purposes, capital
securities are deeply
subordinated instruments that
qualify as regulatory capital or
receive quasi
-equity credit from
the rating agencies
Capital Securities
For index purposes, capital securities are deeply subordinated fixed income securities that
qualify for treatment as regulatory capital by regulators or receive quasi-equity credit from the
rating agencies. Bloomberg publishes a Global Capital Securities Index to track the market for
these bonds, which also qualify for the flagship aggregate and high yield indices, depending
on
their credit quality. While also considered capital securities, bonds identified as contingent
capital are excluded as a rule from Bloomberg
aggregate and high yield indices, but are tracked
in a standalone Global Contingent Capital Index.
Types of hybrid capital instruments included in capital securities indices include:
● Tier 1 (“T1”): bonds that are deeply subordinated securities, senior only to equity, and have
coupon deferral features (both optional and mandatory) without incurring a default event.
Common characteristics of traditional T1 instruments generally include:
○ Perpetual, but callable.
○ No contractual obligation to pay dividends or interest to T1 bondholders, with the
deferral of a coupon usually being at the option of the issuer.
○ Deferred coupons are non-cumulative.
○ T1 should be able to absorb losses before, or instead of, general creditors.
● Upper Tier 2 (“UT2”): UT2 securities are long-dated or perpetual callable bonds with
interest deferral features that allow the issuer, at its own option, to defer payment under
specific circumstances, such as falling below capital adequacy requirements. Interest
payments on UT2 securities are cumulative (e.g., payments have to be made up at a later
date) and interest on interest is normally payable in the event of deferral.
● Lower Tier 2 (“LT2”): dated securities whose coupons are not deferrable without triggering
a default. LT2 bonds have a minimum maturity of five years and often have interest step-ups
and calls five years prior to maturity.
72
● Capital Credit (“CCRDT”): hybrid capital securities issued by various types of non-bank
entities are classified as capital credit. Issues are primarily from US or European insurance
companies,
73
with structures among non-bank issuers varying greatly. Secur
ity claims tend to
be on parity with junior subordinated debt or preferred shares and are long-dated or
perpetual. Typically, these securities include some form of coupon deferral.
Benchmark Index Rebalancing Rules
Most Bloomberg benchmark indices are rebalanced monthly, offering intra-month stability in
index composition.
74
Securities that meet all published index inclusion rules and eligibility
criteria at the beginning of a given month will remain in the index for purposes of return
calculations until the following month-end, when index composition is next reset.
Unlike the rebalancing of equity indices, which occurs less often, the monthly rebalancing of
Bloomberg Indices better suits the more frequent issuance and the more dynamic borrowing
needs of fixed income issuers.
This section will describe the mechanics of the monthly rebalance process.
72
Effective September 7, 2017, subordination classification of Senior Non-Preferred debt changed to "Senior" from "Lower Tier 2 (LT2)".
73
Insurance companies usually issue capital securities to get regulatory capital treatment, while industrial and utility companies do so to get quasi-equity credit from the
rating agencies.
74
Certain tradable bond indices may rebalance less frequently, on either a semi-annual or an annual basis. In addition, alternative weight benchmarks such as GDP
Weighted indices and Fiscal Strength Weighted indices have country-level weights or scores that are updated annually, but still rebalance monthly to reflect changes in
the eligible security universes.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 43
Two universes of securities are
maintained for each Bloomber
g
index: a fixed “Returns Universe”
and a dynamic “Projected
Universe”
Benchmark Returns and Projected Universes
For each Bloomberg index, two universes of securities are maintained: one that is held constant
throughout the month from the previous index rebalancing date and one that changes daily to
reflect the latest composition of the market since the last rebalancing. The former, the Returns
Universe (also referred to as the “backwards” universe), is a static set of securities that is
determined at the beginning of each month and is not reset until the beginning of the next
month. This fixed universe is used to calculate daily and monthly index returns and is the basket
of bonds, based on which index users are officially measured against. The Returns Universe is
not adjusted for securities that become ineligible for the index during the month (e.g., due to
ratings downgrades, called bonds, securities falling below one year to maturity) or for issues that
are newly eligible (e.g., ratings changes, new issuance). Because the Returns Universe is held
constant throughout the month, fund managers avoid having to hit a moving target.
The Projected (Forward) Universe is a dynamic set of bonds that changes daily to reflect the
latest set of index-eligible securities. As an up-to-date projection of the next month’s Returns
Universe, the Projected Universe assists active managers by providing them with the necessary
insight to modify their portfolios ahead of any index changes and assists passive managers by
preparing them for any executions needed ahead of monthly rebalancing. Indicat
ive changes to
securities are reflected daily in both the Projected and Returns Universes of the index and may
cause bonds to enter or fall out of the Projected Universe, but will affect the composition of the
Returns Universe only at month-end. The examples below illustrate how several transactions are
treated in the Returns and Projected Universes over the course of a month.
1. Returns and Projected Universe Dynamics: Sample Movements
○ XYZ Company 4.5% of 3/15/2021 is a developed market bond with USD500mn amount
outstanding that meets all criteria for the US Corporate Investment Grade Index as of May
31. On June 4, the bond is downgraded to Ba1 from Baa3.
○ This bond will continue to
contribute to returns for the duration of June, even though it is
now rated below investment grade.
○ The bond will drop from the Projected Universe after the downgrade because it is below
investment grade and will not be eligible for the benchmark when it is next rebalanced at
month-end. This bond will therefore be excluded from index-
level analytics aggregations
that are published in the Projected Universe.
○ The downgraded bond will enter the US Corporate High Yield Index Projected Universe
once it drops from the US Corporate Investment Grade Index.
2. ABC Company 2.875% of 1/15/2027 meets all index criteria when it is issued on June 15.
○ This bond will not contribute to returns reported for the month of June.
○ The bond will enter the Projected Universe for June (assuming all security reference
information and pricing are available).
3. US Treasury 1.875% of 6/30/2024 was issued months ago and has several years to maturity
on September 15.
○ This bond will be included in both the Returns and Projected Universes for September.
4. RST Company 3.750% of 6/30/2017 meets all criteria for the US Corporate Investment Grade
Index on May 31, 2016.
○ This bond will contribute to the Returns Universe until June month-end.
○ Because the maturity is known with certainty, the bond will fall out of the Projected
Universe on the first day of June.
○ All flagship benchmarks with a 1 year minimum to maturity will automatically exclude
bonds that are expected to drop below 1 year with certainty during the month as of the
first business day to provide as early a forecast of index composition as possible.
5. LMN Company 6.750% of 8/15/2017 is called on April 15, 2016.
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Bloomberg Fixed Income Index Methodology 44
○ This bond contributes to returns for April. The ending price is the call price.
○ This bond will drop out of the Projected Universe as of the call date.
“Index flags” consolidate a
number of
common eligibility
criteria into a single attribute
Bloomberg “Index Flags”
For many flagship Bloomberg Indices, a composite index flag is calculated and published on a
daily basis, which identifies whether a security meets the eligibility criteria of a particular index
with a single attribute.
75
76
Index flags are valuable for a number of reasons. First, they simplify the identification of index-
eligible securities within a large data set and enable an index user to design more granular or
customized indices in a streamlined fashion. Most published sub-indices use an existing index
flag for a particular benchmark family and then apply additional constraints to narrow or
segment the investment universe further.
Second, bond-level index flags allow investors to easily identify crossover exposure within other
benchmark index families because they are not mutually exclusive. For example, an investor
seeking to identify the portion of the Global Aggregate Index that is also eligible for the EM
Local Currency Government Index can do so using index flags, rather than replicating a long set
of eligibility criteria to filter the universes.
Finally, index flags enable timely benchmark turnover analysis by giving daily projections of
expected index composition as of the next rebalancing date. This is done by simultaneously
identifying whether a security is eligible for an index as of a particular date and whether it was
eligible as of the last index rebalancing. From this information, an index user can identify
leavers, joiners and continuing issues for a benchmark index. Details on the mechanics of index
flags can be found in the section “Benchmark Index Rebalancing.”
By family, benchmarks that have index flags available at the security level include:
● Aggregate: US, Pan-European, Asian-Pacific, Global, Canadian, China, Japanese
● Corporate: 144A, Eurodollar, Euroyen, Capital Securities, Contingent Capital
● High Yield: US HY, Pan-European HY, HY Floating-Rate Note
● Treasury: Global Treasury, US Treasury Floating-Rate
● Emerging Markets: EM Local Currency Government Universal, EM USD Aggregate, EM
Hard Currency Aggregate, EM Pan-European Aggregate
● Inflation-Linked: Global Inflation-Linked
● Securitized: US CMBS, Floating-Rate ABS, Agency CMBS
● Convertibles: US, EMEA, APAC
Municipals: Municipal, Taxable Municipal, Municipal HY
Index flags will have one of four values that identify whether a security should be included in the
Returns or Projected Universe of a given benchmark:
● BOTH_IND: An index flag value of BOTH_IND identifies a security as having been index
eligible at the beginning of the month and as of the current date. It is therefore a contributor
to both the Returns and Projected Universes of a given flagship index (Area B within Figure
14).
● FORWARD: An index flag value of FORWARD identifies a security as having not been index
eligible at the beginning of the month but eligible as of the current intra-month date. The
bond is therefore a contributor only to the Projected Universe of a given flagship index and
will contribute to index returns only after the next index rebalancing (Area C within Figure
14). Bonds with a FORWARD flag may include new issues or existing issues that newly qualify
for a specific index. For example, an existing bond that is downgraded below investment
75
Although index flags encompass many of the core attributes discussed in the previous section through a single data field, there may be other index eligibility criteria
embedded in a derived index flag value.
76
Index flags are available only on Series-L benchmarks. Series-B benchmarks publish constituents on the equivalent of a Returns Universe only, but a separate Forward
Index Report (“FIR”) is available for major indices, such as the WGILB Index, to offer a projection of index composition as of the next index rebalancing.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 45
grade may have the FORWARD index flag for a high yield benchmark if it meets all other
index inclusion rules after the ratings change and a BACKWARDS flag for the investment
grade index it is departing.
● BACKWARDS: An index flag value of BACKWARDS identifies a security as having been
index eligible at the beginning of the month but now not eligible as of the current intra-
month date. It will exit the index and is therefore a contributor only to the Returns Universe of
a given flagship index (Area A within Figure 14), and not the Projected Universe.
● NOT_IND: An index flag value of NOT_IND identifies a security as having not been index
eligible at the beginning of the month and also as of the current date because it does not
satisfy all of the required index eligibility criteria.
Index flags are a direct input to
the creation of published sub
-
indices by sector, maturity,
credit quality, etc.
Index flags are available only for broad-based indices and are a direct input to the creation of
published sub-indices by sector, maturity, credit quality, etc. When defining narrower sub-
sets of
flagship indices, bonds may enter or exit the Returns or Pro
jected Universes without a change in
the index flag, which only identifies eligibility at the broad index level. Consider, for example, a
security that begins the month with a maturity just over 10 years that drops below 10 years to
maturity during the month. It will move from the Projected Universe of a Long sub-index, which
contains bonds with at least 10 years to maturity, to an Intermediate sub-index, which contains
bonds with 1-10 years to maturity, of that benchmark because of the maturity rule, but the index
flag will remain BOTH_IND.
Figure 14
Bloomberg Index Dynamics
Returns (Backwards) Universe (A+B) Projected (Forward) Universe (B+C)
Static universe of index-eligible bonds set at
the beginning of month to avoid having to hit a
moving target.
Dynamic universe that changes daily and
reflects index-eligible bonds at that time.
Includes bonds that lose eligibility during the
month (A) because they were called,
downgraded/upgraded, or fell below one year
to maturity or the minimum liquidity.
Includes bonds that become index eligible
during the month (C), such as new issues and
bonds that were upgraded/downgraded into
an index.
Bonds that lose eligibility do not leave the
Returns Universe until month-end.
Used for rebalancing since Projected Universe
becomes Returns Universe at month-end.
Used to report index performance (returns).
Used to report index statistics (duration,
market value, OAS, etc.).
Turnover measures the index
composition shift using the
market value of securities
entering and exiting an index
Index Rebalancing Dynamics
Index Turnover
Index turnover is an estimate of gross index composition shift measured by the market value of
securities entering and exiting an index (as a percentage of the index’s beginning market value).
Expected monthly turnover occurs from the regular issuance and borrowing patterns of index-
eligible issuers as bonds exit and enter an index. When index rules changes are implemented,
Backward
Forward
A
B
C
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 46
there may also be one-time turnover as securities enter an index or formerly index-eligible
bonds are dropped under the new guidelines. The Projected Universe of any benchmark
reflects the net effect of any additions and drops on index composition on a daily basis and
forecasts what the index composition would be if the index were reset at that specific date.
Understanding the sources of turnover entails understanding an index’s specific rules for
eligibility. With objective rules in place, a bond will either be index-eligible or not eligible at the
time of a monthly rebalance. Any issue whose eligibility status has changed since the previous
month-end will contribute to turnover by either exiting or entering the index. These issues can
be divided into two classes: “drops” and “additions”.
77
Drops (Issues Exiting an Index)
Issues that are no longer index-eligible can be referred to as “drops” when quantifying index
turnover. An issue is dropped from an index under two circumstances: 1) it no longer meets the
rules for inclusion, or 2) its security status has changed (called or exchanged) and it no longer
exists in its current form.
All Bloomberg
Indices have formal rules on amount outstanding minimums, time to maturity and
credit rating, which together are the most common sources of rules-based drops. The other
main reason for an issue to exit an index is that its status has changed, and th
e security no longer
exists in its current CUSIP or ISIN. In cases where a security enters an index and is later identified
as a retail bond or privately placed security, it will be dropped from the index in light of the new
information.
Additions (Issues Entering an Index)
Most issues that enter the Bloomberg Indices are newly issued instruments. Other additions
include issues that have been upgraded to investment grade from high yield, or vice versa, and
bonds with a change to indicative data, such as country of risk or sector. Despite these other
sources of turnover, new issuance accounts for most of the index additions to broad-based
benchmark indices.
For the US Aggregate Index, new monthly production of MBS pools will not have their own
unique identifier unless a given MBS generic
78
is entering the index for the first time after
meeting the USD1bn minimum threshold. Since the index uses generic identifiers based on
program, coupon and vintage in its construction, new pool issuance will be reflected as an
increase in par amount outstanding of existing MBS generics.
New securities can also enter the indices based on rules changes. These additions create a one-
time increase in index turnover when they enter the index. Examples of recent additions include
countries that were added to the emerging markets indices in April 2013, and inclusion of HUF-
denominated debt in the Global Aggregate and Global Treasury Indices in April 2017.
Gross Index Turnover
The combined sum of bonds leaving and joining the index equals gross index turnover, defined
in the formula below as MVDrops and MVAdditions. Since the index composition and beginning
market values used in the denominator change monthly, monthly turnover percentages are
summed to estimate an annual index turnover.
Monthly Turnover
TURNOVERMonthly = MVBeginningDrops + MVEndingAdditions
% TURNOVERMonthly = (MVBeginningDrops + MVEndingAdditions) / MVBeginningIndex
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For more narrowly defined sub-indices, turnover can occur when securities cross over from one bucket to another, even if there is no turnover within the broader
benchmark. For example, a bond whose time to maturity drops below 10 years to maturity would not contribute to the turnover of a broad-based index, but would be
considered both an addition (to sub 10 year maturity indices) and a drop (from 10+ year maturity indices) to other narrower maturity based sub-indices.
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The Bloomberg US MBS Index is constructed by grouping individual MBS pools with the same program, coupon and vintage into a “generic” aggregate with its own
unique eight-character “generic CUSIP”. Each “generic”, as they are typically referred to within the context of the indices, is a proxy for all of the outstanding eligible
pools for a given program, coupon and origination year. Beginning July 2019, Freddie generics are further separated into 45- and 55-day delay securities to reflect
UMBS initiative. The identifiers for MBS generics are not street CUSIPs or identifiers, but rather proprietary constructs of Bloomberg MBS methodology.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 47
Annual Turnover
TURNOVERAnnual = Sum of Monthly Drops + Sum of Monthly Additions
% TURNOVERAnnual = Sum of Monthly Drops % + Sum of Monthly Additions %
Treatment of Cash
The timing and treatment of cash in Bloomberg Indices is an important consideration for index
users who are managing against the indices actively or passively, since it affects decisions
concerning intra-month cash reinvestment and month-end rebalancing within their portfolios.
Cash that has accrue
d within the
Returns Universe intra
-month
earns no reinvestment return
Effect of Cash on the Returns Universe
Cash that has accrued within the Returns Universe intra-month earns no reinvestment return.
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The events that cause cash to enter the index (coupon and principal payments) are accounted
for in monthly total returns calculations as coupon or paydown return, but the cash itself does
not generate its own partial month return for the period it resides in the Returns Universe.
Because the indices are constructed as a rules-based basket of bonds and not treated as a
portfolio, accumulated cash is stripped out of the index at month-end and effectively reinvested
pro rata across the entire index for cumulative returns purposes.
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When calculating cumulative returns over periods longer than one month, index cash (as
captured in coupon and paydown return) is implicitly reinvested back into the Returns Universe
to calculate an accurate since inception total return that reflects compounding.
For indices that rebalance less frequently, cash is still reinvested pro rata at end of each month
and cumulative returns over periods longer than one month still reflect monthly compounding.
Duration extension quantifies
the instant index durati
on
change that occurs when index
membership is reset each
month
-end
Duration Extension
Duration extension quantifies the instant index duration change that occurs when index
membership is reset each month-end. It accounts for monthly index turnover but also factors in
the outflow of accumulated cash as the index is reset. The duration metric used for purposes of
duration extension is option adjusted duration (
“OAD”) for US indices and ISMA option adjusted
duration
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for non-US indices.
Returns Universe Duration vs. Projected Universe Duration
For both the Returns and Projected Universes, an index-level duration figure is published as an
aggregation of bond-level durations of each universe’s index-eligible securities. Differences
between these two index-level metrics reflects projected changes to index composition
(turnover reflected in the Projected Universe) and the amount of cash earned by the index from
coupon and principal (accumulated in the Returns Universe).
Because the Projected Universe duration is not adjusted for cash, each bond is weighted by its
current market value to derive the index-level Projected Universe duration. The bonds
contributing to the Projected duration may change daily as they enter and exit the projected
index. Additionally, the contribution of each bond to index-level duration may change as calls,
taps and new issuance (specifically in the case of MBS generics) are reflected in each bond’s
amount outstanding. Price movements also affect a bond’s contribution to index-level duration.
Returns Universe duration is calculated the same way as Projected duration, but is adjusted
downward for the amount of cash each security has accumulated at a zero duration. The
adjustment is done using the market value for each bond within the Return
s Universe (RU Market
Value), which contains two components:
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Starting on January 1, 2011, Series-B indices total return calculations were made consistent with Series-L total return calculations in terms of cash treatment. From July 1,
2006, through December 31, 2010, income from coupon (and principal payments in the case of amortizing bonds) was held as cash and accrued on a monthly re-
investment rate until the next rebalancing date, when it was re-invested in the index. Prior to July 1, 2006, income from coupon payments was reinvested in the index as
soon as it was received.
80
For Series-B indices, the mechanics are slightly different, though cumulative return calculations are effectively identical. Cash that has been earned by the index intra-
month also earns no reinvestment return, but the cumulative cash balance at the security level is recorded as Cash Held for return calculations, which are done by
tracking the index market value over time. This cash held balance is reset annually.
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ISMA (International Securities Market Association) duration measures the price sensitivity to changes in ISMA yield to maturity, which assumes annual coupon
payments. Semi-annual coupons are assumed for US yield and duration calculations.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 48
1. RU Security Market Value: The market value of the underlying security.
2. RU Cash Market Value: The amount of accumulated cash.
To adjust a security’s contribution to index-
level duration for cash, its RU Security Market Value is
divided by the total RU Market Value of all the bonds in the Returns Universe to arrive at the
index-level figure. The scaling in weighting will always be
less than or equal to 100%, depending
on whether a security has earned any cash during the month. If no cash has been earned, the
cash scaling factor will be one and the security’s contribution to Returns duration and Projected
duration will be the same.
Duration Extension Methodology
At the close of the last business day of each month, the Bloomberg Indices are reset and bonds
formally enter and exit the index, while cash that has accumulated in the Returns Universe
during the month is removed. At this moment, the Projected Universe has become the next
month’s Returns Universe and the realized duration extension is simply the difference in the end
-
of-month Returns and Projected durations. At month-end, the extension is known with certainty
and easily derived by comparing the duration of the two published universes.
There is usually a lengthening of an index’s duration each month due to cash and bonds that are
being dropped from the index often having lower durations than the bonds that remain in or
enter an index. Occasionally, there is a duration shortening when the opposite is true (bonds
exiting the index have higher durations than the residual index). In either case, passive
managers must therefore react to this change and lengthen (shorten) their duration exposure
accordingly each month to remain duration neutral.
Accessing Duration Extension Estimates
Actual duration extensions can be easily obtained by taking the difference between the Returns
Universe and Projected Universe duration of an index at month-end. Prior to month-end,
Bloomberg publishes periodic index duration extension estimates using forecasted turnover
and cash estimates. These projections appear in Summary of Index Duration Changes and in
Benchmark Index Duration Extension & Rebalanci
ng Forecast reports available on INP<GO> (the
Index Publications page on the Bloomberg Terminal).
All securities are assumed to
settle on a T+1 calendar day
basis, except for US MBS
Other Index Rebalancing Mechanics
Settlement Assumptions
For index purposes, securities are assumed to settle on a T+1 calendar day basis,
82
except for US
MBS pass-throughs, which assume same-day (T+0) settlement.
On the last business day of each month, the index settlement date is assumed to be the first
calendar day of the following month even if the last business day is not the last calendar day of
the month.
83
This allows for one full month of accrued interest to be calculated.
84
The only
exception is the US MBS Index, for which end-of-month index returns are calculated assuming
that the trade date and the settlement date are the last calendar date of the month.
Series-B Index Settlement Assumptions
Series-B inflation-linked and nominal government bond indices assume local market settlement
conventions and holiday calendars, which vary from market to market, ranging from T+1
business days to T+3 business days for certain linker markets. Because this index family uses
different conventions, an index user may see a different accrued interest value or index ratio
calculated for the same security in a Series-B versus a Series-L index.
85
82
Using a T+1 calendar day settlement assumption intra-month means that accrued interest as of a Friday business day will not include accrued interest for the weekend.
Accrual for the weekend will be reflected on the first business day after the weekend.
83
This applies to both Series-L and Series-B indices.
84
Cash is therefore recognized by the index on the last calendar day before the coupon record date. For example, if a coupon record date is the first of the month, cash
will be recognized in the Returns Universe on the last day of the previous month under this settlement assumption. This is a common question from index users, in
particular when a security coupon date is close to a month-end, but the settlement/payment date occurs in the ensuing month.
85
This question often comes up when comparing US TIPS securities that trade on a T+1 business day basis. On a Friday or the last business day of the month, the
settlement assumption may extend further than the next calendar day assumed by the T+1 calendar methodology. Series-L US TIPS bonds settle on a T+1 calendar day
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 49
Ex-Dividend Conventions
The ex-
dividend date is the first date on which the holder of a bond is not entitled to receive the
next interest payment. Securities in certain markets, such as the UK Gilt market, trade with ex-
dividend dates, and the accrued interest of affected securities will reflect the appropriate
conventions of a given market. Index users will see the accrued interest of a bond show as
negative once it starts trading ex-dividend and the expected coupon payment discounted back
to the current index settlement day in Returns Universe calculations.
The Bloomberg
Indices employ
a regional approach for index
holiday schedules
Holiday Calendars
The Bloomberg
Indices employ a regional approach for index holiday schedules, as opposed to
using a single holiday calendar for all indices or basing production on the calendars of each of
the 39 currencies currently represented by the indices. The regional holiday calendar followed
by each currency covered in the indices can be found in Figure 15. Single-currency indices are
not produced if the calendar that currency follows is on holiday. Publication of multi-currency
global and regional indices that include bonds following different holiday calendars is discussed
in the following sections.
Publication of Global Indices
Multi-
currency indices, such as the Global Aggregate Index, are generated every business day of
the year except for New Year’s Day, the only holiday shared by all regional calendars. During
other regional holidays, global indices are still generated but use prices from the previous
business day for markets on holiday. On July 4, for example, the US Aggregate Index is not
produced because the US holiday calendar observes Independence Day. USD-denominated
bonds in the Global Aggregate Index, which is still produced, show a price from the previous
business day.
Publication of Regional Indices
Regional, multi-currency indices that share more than one holiday calendar, such as the Asian-
Pacific Aggregate Index, are generated as long as any market followed by one of the eligible
currencies is open.
86
In these cases, the price from the previous business day for markets on
holiday is used and total returns of the indices still include currency returns from updated FX
rates and coupon return from accrued interest being generated. For example, if Singapore is
observing a bank holiday, SGD-denominated bonds, as well as any currencies not on holiday
but following the Singaporean calendar (MYR, THB, IDR and PHP), will still contribute to the Asia
-
Pacific Ag
gregate published for that day but with no price performance since their prices will be
carried forward unchanged from the previous Singaporean business day.
Figure 15
Regional Holiday Calendars Observed by Currency
Region Currency Holiday Calendar
Americas ARS, BRL, CAD, CLP, COP, MXN, PEN, USD United States
EMEA
CHF, CZK, DKK, EGP, EUR, GBP, HRK, HUF, ILS,
NGN, NOK, PLN, RON, RUB, SEK, TRY, ZAR
United Kingdom
Asia-Pacific
JPY
Japan
AUD, NZD
Australia
HKD, TWD Hong Kong
KRW
Korea
IDR, MYR, PHP, SGD, THB
Singapore
CNH , CNY
China
INR India
basis (or if month end - on 1
st
calendar day of next month), whereas Series-B US TIPS bonds that trade on Friday would settle on Monday (or Tuesday if Monday is a US
holiday).
86
On July 1, 2011, four additional Asian bond market calendars (Australia, Hong Kong, South Korea and Singapore) joined the Japanese calendar to determine the index
publication schedule for the Asian-Pacific Aggregate Indices. Additionally, the publication schedule for Asian-Pacific currencies in the EM Local Currency Indices added
three Asian bond market calendars (Hong Kong, South Korea and Singapore). The Asian-Pacific Aggregate and EM Local Currency Government Indices were previously
published based on Japanese market holidays only, with the exception of China and India, which already used their own regional calendars.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 50
In most cases, the EMEA region follows the UK holiday calendar. However, if the last business
day of the month is a UK holiday, prices may be updated for non-GBP-
denominated bonds if the
European markets are open. In such cases, prices from the previous day are rolled over for GBP-
denominated bonds observing the UK holiday for month-end.
Series-B Indices Holiday Schedule
Series-B indices are published every calendar day. On days in which a particular market is
closed, prices and analytics from the previous business day are rolled forward on that day.
Timing of New Issues
Qualifying securities issued but not necessarily settled on or before the month-end rebalancing
date will qualify for inclusion in the following month’s index, provided the required security’s
reference information and pricing are readily availability.
87
Inclusion of When Issued US Treasuries
US Treasuries are added to the Projected Universes of the US Aggregate and US Treasury
Indices with an assumed coupon on the announcement date, if auctioned in the same month.
The coupon is then updated on the auction date. If US Treasuries are not auctioned in the same
month as when they are announced, they are added to the Projected Universe of the indices in
the month they are auctioned.
Rebalancing Details for Other Indices
Certain bespoke, alternate weight and tradable indices rebalance at a set time each year.
Fiscal Strength and GDP Weighted Indices
For the Fiscal Strength Weighted Index family, country scores for the following year are
published in early November, reflected in the November Forward (Projected) Universe and take
effect as of the annual rebalancing date on December 1.
GDP weights are announced in early October, reflected in the November Forward (Projected)
Universe and take effect as of the annual rebalancing date on December
1. Monthly rebalancing
occurs for underlying bonds entering and exiting the specific country sub-indices used by these
benchmarks.
EM Tradable Indices
Most EM tradable indices will rebalance on a semi-
annual or an annual basis. These were explicit
design features to minimize turnover in these benchmarks.
Benchmark Index Pricing and Analytics
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Fungible bonds that will funge within two months from issue are not eligible for indices. Funge amount is included in existing bond when funge.
After identifying an eligible universe of securities using a rules-based set of inclusion criteria, an
index provider must then accurately measure the daily return and risk characteristics of these
bonds for benchmark index users.
Analytics for index-eligible securities provide investors with the necessary tools to assess the
riskiness of bonds within their investment choice set and make relative value decisions within
their portfolios. With an under- or overweight to their benchmark in duration or spread, for
example, an investor is also able to express views within their portfolio on the market
environment (e.g., rates will rise) or achieve specific objectives of their mandate (e.g., minimize
risk).
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 51
88
Bond-level prices are made available to appropriately licensed users.
89
Investment grade and USD- and EUR-denominated corporates. US High Yield corporates also enter on the offer side starting June 1, 2017. Prior to that date, US High
Yield securities entered on the bid side.
The following section provides an overview of the indices’ pricing methodology and the key
analytics calculated for securities in the fixed income benchmarks.
Benchmark Index Pricing
In pricing the benchmark indices, Bloomberg aims to mark each bond with an appropriate and
observable level when available, whether sourced internally or supplied by a third-party pricing
vendor.
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In addition to pricing sources, other pricing considerations (quote side, settlement
and timing) are important as they often provide the basis for relating an index price with levels
observed in the market.
This section offers a high-level overview of the pricing process and conventions used for
Bloomberg benchmark indices. For additional details on asset classes and regions, please see
“Appendix 4: Pricing Methodology for the Bloomberg Indices.”
Pricing Sources
Independent and transparent pricing is an important part of Bloomberg’s index family. Rather
than relying on single-dealer pricing or composite pricing across a small number of dealers, the
primary pricing source of bonds in Bloomberg ’s Indices is BVAL. BVAL provides credible,
transparent and defensible valuations across a broad spectrum of financial instruments,
including fixed income, derivatives and structured notes. These prices are independent, drawing
on numerous sources relevant to the market. This broad global dataset of market observations is
combined with analytics to produce objective pricing with transparency into how the prices are
derived. As of the publication date of this document, the only Bloomberg index families not
priced by BVAL are CHF-denominated bonds (which use SIX Swiss Exchange) and JPY
Corporates (which use Japan Securities Dealers Association, aka JSDA). If any of the pricing
sources were to fail to generate a security’s price, the security will be priced using information
from the last index publication date.
Details regarding BVAL’s pricing methodologies, including the use of extrapolation techniques
in creating such input data, are available at BVLI <Go> on the Terminal.
Pricing Verification
A dedicated index pricing team validates the quality of index pricing daily, including review of
possible outliers resulting from the verification process. Index users may also challenge price
levels, which are then reviewed by the pricing team. If a discrepancy arises, the team works with
BVAL and may adjust prices on a going forward basis.
For inquiries regarding access to BVAL prices and methodologies, please contact the BVAL
team at BVAL@bloomberg.net
. For any o
ther questions, please contact your regional index team
or email indexpricing@bloomberg.net.
Pricing Quote Conventions
Most index-eligible securities are quoted as a percentage of par. Some inflation-linked bonds
use Real or Native yield as a direct input.
Most securities are also quoted on the bid side, with the exception of inflation-linked securities
and EUR-, GBP-, and JPY-denominated nominal tre
asuries, which are priced on the mid side and
new corporates
89
entering the index on the offer side in the first month.
Bid pricing values a bond at the level where an investor would be able to sell it as of the index
pricing date and is a convention used by many investors for fair value accounting and reporting.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 52
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An illustration of the “one price” concept is when a bond marked on the bid side in an investment grade index is downgraded to below investment grade status and
enters a high yield index still at the bid price, not at the offer price.
91
GCC is defined as: Qatar, Bahrain, UAE, Saudi Arabia, Kuwait, and Oman.
Mid side pricing values securities halfway between the bid and offer price to reflect the fair value
of a bond that is agnostic to whether it is being bought or sold. It is generally prudent for
markets with liquidity extremes: highly liquid markets where bid-mid spreads are very narrow or
highly illiquid ones, such as emerging markets linkers, where daily bid-mid spreads may be
difficult to determine due to a lack of secondary market activity. Within the indices, EUR, GBP
and JPY government bonds are quoted on the mid side, not only because they typically have
very narrow bid-mid spreads, but also because this is the market convention.
While different markets or asset classes represented in Bloomberg benchmark indices may be
quoted using different conventions, we maintain the concept of “one price” for index bonds. In
other words, each bond will employ only one price from one pricing source that will be used in
all benchmark indices for which it is eligible.
90
Pricing Timing and Frequency
The time at which the price is taken for a particular bond is regionally based. Generally, bonds
are priced at 3pm New York time for US markets (except Taxable Municipals, which are priced at
4pm), 4pm New York time for Canadian markets, and 4:15pm London time for Pan-European
markets. For Asian-Pacific indices, prices are taken at different times, depending on the local
market convention, and are subject to change based on a semi-annual review: 3pm Tokyo time
for Japan; 5pm Shanghai time for China; 5pm Tokyo time for Hong Kong, Malaysia, Singapore,
South Korea, Taiwan and Thailand; 12pm London time for India; and 5pm Sydney time for
Australia and New Zealand. In addition, Asia High Yield is priced at 5pm Tokyo time; GCC
91
is
priced at 4:15pm London time; and local currency LATAM bonds are priced at 4pm New York
time. When the markets close early for holidays, prices may be taken earlier in the day.
Most index bonds are priced daily, except on market holidays.
Pricing Settlement Assumptions
For index purposes, securities in the Series-L indices are assumed to settle on the next calendar
day (T+1) for each index pricing date, except for US MBS pass-throughs, which are priced based
on same-day settlement (T+0).
At month-end, the settlement date is assumed to be the first day of the following month, even if
the last business day is not the last calendar day of the month. This procedure allows for one full
month of accrued interest to be calculated. The only exception is the US MBS Index, for which
end-of-
month index returns are calculated assuming that the trade date and the settlement date
are the last calendar date of the month.
Series-B indices, such as the World Government Inflation-Linked Bond Index (“WGILB”), use
local market settlement conventions for accrued interest calculations.
Benchmark Index Analytics
Index users rely on a range of fixed income analytics calculated by Bloomberg to quantify
various risk exposures (duration, convexity, volatility, etc.) and the corresponding sensitivity to
those risks for a given security, sector or asset class. Comparing the analytics of a portfolio
relative to its benchmark allows investors to measure the magnitude of particular risks
embedded within their portfolios and how they relate to the broad market. While some analytics
calculations are relatively straightforward and calculated in a similar manner across index
providers, others rely on propriety models (such as an MBS prepayment model).
The following section provides an overview of the major types of analytics available for the
Bloomberg Indices (duration, convexity, spread and yield) and a brief discussion of the types of
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 53
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In 1989, OAD (also referred to as effective duration or modified adjusted duration) replaced Macaulay duration as the published index duration for the benchmark
indices.
93
Bloomberg uses a lognormal option model and the current price of the bond to calculate the option adjusted spread (OAS) of the bond.
94
For example, even though MBS pass-throughs usually have higher yields than Treasuries, they many underperform Treasuries if rates move from the base case due to
their inherent negative convexity.
model-driven, research-based metrics that have been developed in recent years. Calculations
for many of these can be found in “Appendix 7: Glossary of Terms – Index Analytics.”
Duration
While several variants of duration exist for fixed income securities, investors generally think of
duration as a measure of sensitivity of a bond’s price to interest rates (as represented by the
change in price for a given change in yield). The duration of a portfolio relative to a benchmark
can then be used to express an investor’s view on the interest rate environment.
Option Adjusted Duration
(“OAD”) is the most widely used
duration metric for Bloomberg
Indices
Bloomberg calculates a number of measures of duration for each security, including Modified
Duration, Macaulay Duration and Option Adjusted Duration (“OAD”).
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The most widely
used duration metric, OAD, offers perhaps the best measure of price/yield sensitivity for bonds
with embedded optionality, such as securitized bonds and callable government/ corporate
issues. OAD is calculated by shocking the par yield curve up and down by a fixed amount and
measuring the resulting change in price.
93
For non-US indices, ISMA duration is often used in
place of OAD. The major difference between these two measures is
the assumption of an annual
coupon in ISMA yield calculations instead of the semi-annual coupon in the OAD calculations.
In addition to OAD, Bloomberg calculates key rate duration (“KRDs”) at six points on the
curve: 6m, 2y, 5y, 10y, 20y and 30y. The movements of the par yields at these points are
assumed to capture the overall movement of the yield curve; therefore, the sum approximately
equals the total OAD of the bond. By shifting only part of the yield curve while holding the rest
of it fixed and repricing the bond at a constant OAS, we are able to measure the sensitivity of a
bond to these different parts of the curve.
To incorporate the unique risk factors and conventions of certain fixed income markets,
Bloomberg calculates asset class-specific durations (e.g., real versus nominal duration for US
TIPS) and incorporates certain conventions for other asset classes, such as mortgage duration.
Please see the “Appendix 7: Glossary of Terms – Index Analytics” for more details on these fields.
Convexity
Similar to duration, convexity is a measure of a security’s sensitivity to interest rates. However,
where duration provides a linear approximation, convexity is a quadratic approximation that
measures how duration changes with changes in yield. Investors are particularly concerned with
convexity in environments where yield movements are large or for asset classes that are
especially sensitive to interest rates, such as US MBS pass-throughs.
OAC measures the curvature of
the change in price of a bond as
rates
move
Option Adjusted Convexity (OAC) is the second derivative of the price-yield function and
measures the curvature of the change in the price of a bond as interest rates move (the rate of
change of OAD for a given change in rates). While it is positive for conventional fixed-income
bonds, it is generally negative for mortgage pass-
throughs. The effect of negative convexity is to
dampen price appreciation if interest rates fall and aggravate the price decline if they rise.
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Spread
Investors often quote the riskiness of a fixed income instrument as a spread above the return of
a reference asset (usually a government bond or curve, but can also be a swap curve). Naturally,
for taking additional “spread risk”, investors expect to be compensated with higher yield.
Spread can be used to compare risk exposures across sectors or peer groups and to make
relative value decisions for bond portfolios. Investors may also target a portfolio spread that is
higher than the spread of their benchmark
if their objective is outperformance. However, since a
higher spread typically exposes the portfolio to liquidity and issuer default risks, the manager
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 54
Benchmark Index Returns Calculations and Weighting Rules
Benchmark index returns are calculated using security-level returns and weights that are reset at
each index rebalancing.
The standard measure of bond return is total return, which includes the local return from interest
accrual/payments (coupon return), security price movements (price return) and scheduled and
unscheduled payments of principal (paydown return). For foreign currency or multi-currency
must be comfortable that such risks are sufficiently compensated by the higher carry return
associated with higher portfolio spread. Passive managers, on the other hand, may seek to
achieve a spread for their portfolio that is more in line with that of their benchmark.
The treasury curve used in OAS
calculations corresponds to a
bond’s currency denominatio
n
A number of spread analytics are available for the indices, including Option Adjusted Spread
(“OAS”), L-OAS, Spread to Benchmark, Spread Duration and Duration Times Spread
(“DTS”). The most commonly used, OAS, is the constant spread that when added to all
discount rates from the treasury curve on the binomial interest rate tree model will make the
theoretical value of the future cash flows equal to the market price of the instrument. The
treasury curve used will correspond to the currency denomination of a bond (e.g., USD bonds
will be calculated against a US Treasury curve, GBP-denominated bonds against a Gilt curve,
JPY-denominated bonds against a JGB curve). Unlike OAS, Spread to Benchmark is not a
model-driven analytic, but is instead a quoted figure
above an assigned security or “bellwether”.
The security over which a bond’s spread is quoted is typically an on-the-run treasury, but can
also be an off-the-run treasury or non-treasury issue.
Yield
Yield can be calculated under a number of assumptions,
including that an investor holds a bond
to maturity, to its call date in the case of bonds with embedded optionality, etc. The Indices’
most widely used yield metrics are yield to worst and yield to maturity, though certain asset
class-specific yield measures are also calculated.
The yield to worst on a bond
represents the lowest potential
yield that an investor would
receive on a bond with
embedded optionality if the
issuer does not default
Yield to maturity reflects the interest payments a bond holder is owed over the life of the bond,
in addition to any gain or loss on price, depending on whether the bond is priced below or
above par. The yield to worst on a bond represents the lowest potential yield that an investor
would receive on a bond with embedded optionality if the issuer does not default. The yield to
worst is calculated by making worst-case scenario assumptions on the issue by calculating the
returns that would be received if provisions, including prepayment, call, or sinking fund, are
used by the issuer.
Yield calculations within the indices are based on an implied discount treasury curve. This curve
is constructed by taking all of the cash flows of the set of liquid treasuries that are used to build
the treasury curve and then uses a spline-fi
tting technique to determine the best discount factors
such that the set of discounted cash flows is equal to par.
Derived and Model-Driven Analytics
Analytics for amortizing assets (such as MBS and ABS) and inflation-linked securities may also
use models that estimate variables such as prepayment speeds, seasonality, and other variables
that can affect duration and OAS. In addition to standard duration, convexity, and spread
analytics, these models may also be used for asset class-specific analytics such as mortgage
prepayment model projections measured by the Constant Prepayment Rate (“CPR”). Specific to
agency US MBS pass-throughs, CPR estimates the portion of a mortgage backed pool that will
be prepaid in the following year. It is used in the calculation of analytics for MBS generics, such
as duration and OAS, and incorporates historical prepayments and forward-looking estimates.
The latter are based on the prepayment model maintained by the Bloomberg mortgage
research team, which incorporates macroeconomic views on the housing market, interest rates,
etc.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 55
indices, a currency return (hedged or unhedged) is calculated for bonds denominated in a
currency different than the base reporting currency of the index. Bloomberg also calculates
excess return that investors use as a proxy for the duration-neutral return of a fixed income
spread sector.
The standard methodology used to weigh security-level returns within a benchmark is market
value weighting: an objective representation of the investment choice set for a particular index.
Under this approach, the weight of each index-eligible security is calculated at the beginning of
each monthly reporting period based on its
price, accrued interest and par amount outstanding.
Other weighting schemes are also available such as capped/constrained weights, GDP weights,
Fiscal Strength weights, and ESG weights.
Most Bloomberg bond indices are rebalanced on a monthly basis, resul
ting in aggregated index
returns that are commonly reported on a month-to-date basis, using bond-level returns and
weights. These month-to-date index returns can be used to derive daily, cumulative and
periodic benchmark returns over shorter and longer reporting windows, as well as multiple
rebalancing periods.
This section will offer an overview of security-level return and weight calculations used to arrive
at benchmark-level returns. More detailed explanations of return calculations can be found in
the appendices.
Bond Total Return Calculations
Published returns for Bloomberg benchmark indices measure the total return of a fixed income
instrument, which includes capital appreciation and security price movements, interest
payments and accruals, and principal repayments (scheduled or unscheduled) in the case of
amortizing or sinkable bonds.
95
Calculating these returns requires daily bond prices, accrued
interest calculations, and a record of the timing and amount of coupon and principal
payments.
96
For multi-currency indices, such as the Global Aggregate Index, or single currency
indices in which the base reporting currency is different than the currency of principal and
coupon payments, an additional currency return (with an option to reflect hedging or not) will
also be included in the total return calculation. Currency return requires a number of additional
inputs including daily spot and forward FX rates and bond-level yields.
The components of a security’s total return are discussed below.
Monthly Price Return
The price return for a given period is derived from changes in security price during the course of
the reporting period (due to factors such as interest rate changes or spread movements) and is
expressed as a percentage of the security
’s beginning of period market value. A clean price that
does not include accrued interest is used in the price return calculation,
97
even for markets that
are quoted on a dirty basis since changes in accrued interest are tracked separately as part of
the coupon return.
=
(
)
(
+
)
95
Components of total return for CMBS bonds can also include writedown return, which is related to the reduction in the outstanding class balance due to a loss of
principal valued at the ending price of the bond, or prepayment penalty return, which is due to additional penalty premiums paid in connection with certain
prepayments that are generally distributed as excess interest on the certificates. See “Appendix 1: Total Return Calculations” for further details.
96
Though generally consistent with the calculation of other fixed income asset classes tracked by Bloomberg Indices, the price, paydown and coupon return calculations
for US mortgage backed pass-throughs differ slightly by incorporating a survival factor into the equation.
97
For inflation-linked securities, published price return will use inflated prices (Real Price * Index Ratio) and inflated accrued interest for price and coupon return
calculations and will therefore include changes in inflation in the return calculations.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 56
Monthly Coupon Return
The coupon return for a given period measures the interest income earned by a security,
reflecting changes in accrued interest
98
plus any interest paid during that period, divided by the
dirty price of the security at the beginning of the period. Coupon return is calculated in the same
manner for both fixed- and floating-rate securities.
99
=
[
+
(
+
)
In the case of a default, the ending accrued interest value is set to zero, reversing out any accrual
posted since the last coupon payment, and the security shows a negative coupon return.
Bloomberg continues to price the security in the Returns Univer
se, and it continues to contribute
to price return until month-end, at which time it is removed from the index.
100
Ex-Dividend Coupon Return
For securities that trade on an ex-dividend basis, coupon accrual resets prior to the actual
payment date based on a predefined period of time, known as the “ex-dividend period”. The
length of the ex-dividend period can vary from market to market, with some as long as 10
business days. The coupon return for bonds that trade ex-dividend is calculated in a manner
similar to other securities. However, in place of an actual interest payment made in the return
calculation, a coupon owed is used during the ex-dividend period prior to actual coupon
payment date and is discounted back to the current index settlement date.
Monthly Paydown Return
Scheduled and unscheduled principal payments prior to a bond’s maturity date are used to
calculate security level paydown returns, which capture the gain or loss when a percentage of a
security’s par outstanding is redeemed, and the security is trading at a price other than par.
=
(100
)
(
+
)
Where:
principal payment = actual principal payment expressed as a percentage of par divided by the
par amount outstanding at the beginning of the period.
Principal payments enter the Returns Universe as cash when they are paid, but they do not earn
an additional reinvestment return for the remainder of the month.
Paydown return is only calculated for amortizing or partially called bonds and is not calculated
for securities that are fully called by the issuer. For fully called bonds, the entire amount
outstanding redeemed enters the Returns Universe as cash at the c
all price; any difference in the
beginning price and the called price is reflected in price return, rather than the paydown return.
Monthly Currency Return
A bond’s currency return is derived from converting local returns to a base reporting currency
different from the underlying currency of the security. If the underlying and reporting currencies
are the same, currency return is zero. Bloomberg calculates hedged and unhedged currency
returns for each reporting currency available for a given index.
Monthly Currency Return (Unhedged)
The unhedged currency return is calculated as the sum of the currency appreciation between
the reporting currency and the currency denomination of a bond and the currency appreciation
of the local return.
=
(
1 +
)
( )
Where:
= + +
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 57
=
(
)
(
)
Monthly Currency Return (Hedged)
Hedged currency returns are designed to limit the FX exposure within an index. Since the
indices rebalance monthly, the hedge is put on for one month, and the hedged currency return
is calculated as:
= +
The components for each can be found in Figure 16.
Figure 16
Components of Hedged Return
Hedged Return Component Calculation
Expected
Currency Return
Relative Forward Rate Differential * (1 +
Expected Local Return)
Relative Forward Rate Differential
(Forward Rate – Spot Rate) / Spot Rate
Expected Local Return
(1 + Yield Beginning of Month/2)^(1/6) - 1
Residual
Currency Return
(% Change in Spot) * (Local Return –
Expected Return)
Local Return
Price Return + Coupon Return + Paydown
Return
Exchange Rate
Base Currency / Local Currency
Forward Rate
Spot Rate Beginning * (1 + One Month Base
Depo) / (1 + One Month Local Depo)
Currency hedging applies to published returns only. Analytics such as duration do not have a
hedged or an unhedged version in either single- or multi-currency indices.
For additional details on the indices’ currency hedging methodology for both Series-L and
Series-B indices, see “Appendix 2: Index Rules for Currency Hedging and Currency Returns.”
Bond Excess Return Calculations
Excess return is a metric used to quantify the duration-neutral return of a security by comparing
the total return of a spread security to that of a risk-
free treasury asset, represented by a treasury
bond. The excess return published for flagship Bloomberg benchmarks, such as the US
Aggregate and Euro Aggregate Indices, is an informational measure and not a tradable hedge
to reduce the treasury duration exposure of the underlying cash index.
101
Excess return is calculated for Bloomberg Indices using either a key rate duration matching
approach or a duration-
bucket approach. Both of these methods are discussed in more detail in
“Appendix 3: Detailed Discussion of Excess Return Computations.”
98
Accrued interest is calculated using a T+1 calendar day settlement assumption for all securities except US MBS pass-throughs, which assume same-day (T+0)
settlement, and Series-B inflation-linked and nominal government bond indices, which assume local market settlement conventions. On the last business day of each
month, index settlement date is assumed to be the first calendar day of the following month, even if the last business day is not the last calendar day of the month, to
allow for a full month of accrued interest to be calculated.
99
Pay-in-Kind securities that pay interest in the form of additional bonds recognize a coupon return only in the month in which additional bonds are paid. Otherwise,
interest does not accrue for these bonds, and coupon return is zero.
100
Though defaulted corporates are not eligible for Bloomberg benchmark indices, such as high yield and emerging markets indices, defaulted treasury and sovereign
debt remain index-eligible.
101
For users looking for such benchmark solutions, Bloomberg offers a family of Mirror Futures (MFI) and Duration-Hedged (DHI) Indices. A MFI is an index whose return
reflects a funded set of Treasury futures, weighted to closely match the beginning of month option adjusted duration (OAD) profile of an underlying standard bond
index. A DHI is a funded index whose return reflects the return on the underlying cash index, with its OAD exposure hedged (fully or partially) using its MFI. For further
details, see Bloomberg Mirror Futures & Duration Hedged Benchmark Indices.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 58
Index Weight Calculations
In addition to security-level returns, the second input required for index-level calculations is
security-level weights, which are reset at each index rebalancing date and available with a
variety of weighting options.
Market Value Weights
Central to the construction and calculation of many Bloomberg
flagship fixed income indices is a
market value weighting design. The appeal of market value weighted indices lies in their
unmanaged nature and objective representations of the broad investment choice set for a given
asset class. Weighting a basket of securities by outstanding debt reflects liquidity and market
capacity for the asset class, resulting in indices that are largely replicable by investors managing
against them. Void of any optimization or investment strategy, market value weighted indices
simply measure the returns and risk characteristics of outstanding debt that meets index
eligibility criteria. In cases where investors do not prefer the allocation or risk exposures of the
broad market, they can express individual market views as active investment decisions to
deviate from the market value weighted benchmark.
Though complex given the sheer size of the fixed income asset class, market value weighted
indices are still easily understood by a range of index users and are the logical starting point for
passive investors seeking an objective measure of an asset class and active investors looking to
formulate more complicated investment strategies to outperform the market. Objectivity,
transparency, universality, market acceptance and asset class coverage are among the most
common reasons investors tend to prefer a market value weighted design. Additionally,
traditional market value weighted indices facilitate better comparisons of asset man
agers to one
another if they are using the same benchmark.
The following section details the specific conventions used by Bloomberg Indices in calculating
index-level returns and statistics. Alternative index designs to market value weighting are also
discussed.
Bond Level Market Value
For each bond in Bloomberg fixed income indices, market value is calculated each day based
on the bond’s current par amount outstanding, price and accrued interest as of the index
settlement date:
=
(
+
)
For multi-currency indices, a security’s market value can be expressed in different reporting
currencies. If the principal amount outstanding of a bond is denominated in a currency different
than the index reporting currency, the amount outstanding would be converted using the spot
exchange rate as of the index pricing date; price and accrued will not change with different
reporting currencies as they are expressed as a percentage of par.
Day-over-day changes to market value can reflect various events such as corporate actions with
adjustments to amount outstanding, yield movements with price fluctuations or an increase in
interest payment due to a bond holder with changes in accrued interest.
Bond-Level Market Value Weights for Index Return Calculations
The market value of each bond within the Returns Universe of an index is set at the outset of
each monthly index reporting period as of the previous month-end index rebalancing date.
These “Beginning” market values are used to derive static security-level weights for index level
return aggregation until the next index rebalancing.
102
The market value used for each bond is
the same across all market value weighted indices and their related sub-indices by sector,
maturity, currency, etc.
% =
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 59
In alternative weight indices, such as those that limit issuer concentration or target specified
sector allocations, each security’s contribution to index-level return is still based on security-
level
market values at the beginning of the month. To satisfy the alterative weighting criteria, the
amount outstanding for each bond is adjusted in a rules-based manner based on the specific
weighting methodology. This adjusted amount outstanding is used to calculate index-level
returns and is held constant throughout the month for each bond in the Returns Universe.
Bond-Level Weights for Index Statistics Calculations
Index-level statistics such as duration, yield and OAS, are weighted by the daily or “Ending”
market value of each index-eligible bond in the Projected Universe. Published sector allocation
percentages for flagship indices are also based on the Projected Universe using ending market
value.
103
% =
In alternative weight indices, the amount outstanding for each bond in the Projected Universe is
rescaled each day, based on current price and accrued interest, to effectively rebalance overall
market value exposures based on the specific alternative weighting scheme. As a result, index
users will see the Projected Universe of an index meet the market value targets of an alternative
weighting scheme each day, even though Returns Universe weights may drift from their initial
targets.
Alternative Weighting Options
Given the size and diversity of the fixed income investor base, some investors may prefer a
departure from the standard market value weighting of Bloomberg flagship indices based on
inclusion criteria or weighting methodology. The reasons for choosing an alternative index
design are varied, but a common thread running through investors’ rationale is that the index
characteristics and risk profile of a market value weighted benchmark do not accurately
represent their portfolio objective or risk tolerance.
Common index alternatives to flagship market value indices that are designed to achieve
specific benchmark objectives are discussed below.
Target Allocations in Composite Indices
Index solutions for investors looking to match a specific investment policy allocation tend to be
straightforward blends or composites of existing indices or sub-indices with weights matching
their policy allocation. As long as the sub-components exist as standalone indices, almost any
allocation-
based index is possible. For example, if a fixed income manager’s preferred allocation
across credit rating within the Bloomberg US Corporate Index is 20% Baa-rated with the
remainder of their benchmark rated A or better, a benchmark can be constructed to match that
allocation.
Capped Indices
Alternative index designs available to investors looking to manage concentration risk generally
consist of capped or diversified indices that apply strict exposure limits within the benchmark
based on issuer weights, sector weights, country exposure, etc. For example, investors
concerned with idiosyncratic risk, especially prevalent in high yield bond portfolios, may use an
issuer capped index, which limits the exposure of any one issuer to a specified percentage of
the overall benchmark based on market value.
Fundamentally Themed Indices
Investors concerned with concentration ris
k or those who believe it is counterintuitive to assign a
higher weight to more indebted issuers may use an advanced index design that uses or
incorporates fundamental factors (instead of outstanding debt) to determine index allocations.
102
For other analytics and statistics, dynamic market values as of each index calculation date are used and are reported for the Projected Universe index composition.
103
To avoid a circular reference, average price and coupon are weighted by end of period par value.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 60
The Bloomberg GDP weighted indices employ such a strategy with GDP (a proxy of a country’s
ability to service its debt) used as the basis for country-level weights within a benchmark.
Another weighting option is Bloomberg Fiscal Strength weighted methodology, which uses
measures of financial solvency (debt as a percentage of GDP, deficit as a percentage of GDP),
dependence on external financing (current account balance as a percentage of GDP), and
governance to adjust market value weights at the country level. Bloomberg MSCI ESG weighted
indices are another fundamentally themed alternative that uses Environmental, Social, and
Governance issuer ratings as a factor to adjust market value weights in an existing benchmark
bond index.
Risk Weighted Indices
Risk weighted indices look at estimates of asset class returns, correlations, and volatilities as the
basis of different security or sub-
index allocations. These types of indices can represent different
risk weighting themes such as risk parity, volatility budgeting, risk budgeting, and minimum
volatility portfolio optimization.
Index Return Calculations and Aggregation
With security-level returns and weights, it is possible to calculate and publish aggregated index-
level returns and risk analytics. Benchmark index returns are reported over various periods
(daily, monthly, annual, etc.); yet monthly returns are the most commonly referenced since they
correspond with the monthly rebalancing of index constituents.
104
Monthly Index Return Calculations
Bond level returns and weights are the inputs used to calculate published monthly index level
returns. Local currency returns at the bond level will be consistent across Bloomberg Indices,
but total returns will vary from index to index based on the base reporting currency and
whether
the index is currency hedged or unhedged. Bond index weights are index-
specific based on the
universe of eligible bonds.
= (
)
Cumulative and Periodic Total Return Calculations
Since Inception Total Return and Index Value
For each Bloomberg index, the cumulative total return since index inception is calculated and
used to determine periodic returns over longer and/or intra-month time horizons. Since
inception total return (SITR)
is calculated at the index level and is a compounded return linking
historical index cumulative monthly returns and the current month-to-
date return. This approach
assumes that the index is always fully invested in the new Returns Universe after each monthly
rebalancing and that any accumulated cash from the previous month is reinvested pro rata into
the new universe.
= 100 +
(
1 +
)
100
From the since inception total return, an index level is calculated by adding 100 and is used to
calculate total returns over any given time period where index levels are available.
= + 100
104
Returns over a given interval are calculated from end-of-day to end-of-day. For example, the return for October 2016 is calculated from September 30, 2016 to
October 31, 2016 and includes interest earned on October 31, 2016, but not interest earned on September 30, 2016.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 61
Daily Total Return Calculations
All daily returns (total return, price return, currency return, paydown return and coupon return)
are calculated as the difference in the month-to-date return for the prior date and the month-to-
date return for the current date, compounded for one day
105
:
=
(
)
[1 +
(
100
)
]
Periodic Excess Return Calculations
Because excess returns are the arithmetic differences between the total return of the index and a
duration-matched hypothetical risk-free security, compounding monthly excess returns is not an
accurate way to display excess returns over time frames longer than one month. However,
whereas excess return cannot be compounded, total return can. Bloomberg publishes both the
total and excess return for each index monthly, so we are also able to calculate a total return of
the implied duration-matched
treasury portfolio of that index (the difference between the excess
and total returns of the index).
Mathematically, the total return of the index and the implied treasury portfolio can then be
compounded separately and compared, even as its composition
is reset every month, yielding a
valid periodic excess return derived from the arithmetic differences between the two.
Duration Hedged/Mirror Futures Index Return Calculations
Bloomberg offers two types of indices – Mirror Futures Indices (MFI) and Duration Hedged
Indices (DHI) – for investors seeking to adjust the duration of their fixed income benchmarks
while preserving the broad coverage and diversification of their existing fixed income
investment set. These indices may be used to replace existing portfolio benchmarks, reference
indices for various replication strategies, or measure interest rate duration-hedged (fully or
partially) bond market returns.
● Mirror Futures Index: An index whose return reflects a funded set of Treasury futures
contracts, weighted to match closely the beginning-of-the-month option-adjusted duration
(OAD) profile of an underlying standard bond index. For example, the US Aggregate MFI will
include five US Treasury futures contracts weighted to match the OAD profile and market
value of the US Aggregate Index, plus a cash investment (a “funding component”) in US
Treasury bills.
● Duration Hedged Index: A funded index whose return reflects the return on the underlying
index, with its OAD exposure hedged (fully or partially) using its MFI. For example, the US
Aggregate DHI is the US Aggregate less its MFI, plus the MFI’s funding component added
back.
Accessing Indices
Bloomberg Indices may be accessed through a variety of platforms.
Bloomberg Terminal®
● INDE<GO>: The Bloomberg Indices dashboard page, which contains daily, monthly, and
year-to-date index returns for key indices from each index family as well as a link to index
publications.
● IN<GO>:
The Bloomberg Index Browser displays the latest performance results and statistics
for the indices as well as history. IN presents the indices that make up Bloomberg's global,
105
Prior to October 1, 2003, all daily return numbers were calculated as the arithmetic difference in return between the MTD Returns over the one-day period.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 62
multi-asset class index families into a hierarchical view, facilitating navigation and
comparisons. The "My Indices" tab allows a user to focus on a set of favorite indices.
● INP<GO>: A page dedicated specifically to all Bloomberg index publications, which among
others include:
○ Index Announcements and Technical Notes related to the indices
○ Index Factsheets for selected indices
○ Primers and Guides
○ Monthly publications, such as Duration Extension, Global Family of Indices (GFOI),
and Linker Monthly Report
● DES<GO>: The index description page provides transparency into an individual index
including membership information, aggregated characteristics and returns, and historical
performance.
● PORT<GO>: Bloomberg’s Portfolio & Risk Analytics solution includes tools to analyze the
risk, return, and current structure of indices. Analyze the performance of a portfolio versus a
benchmark or use models for performance attribution, tracking error analysis, value-at-risk,
scenario analysis, and optimization.
Bloomberg Indices Website
106
The Index website makes available limited index information including current performance
numbers, tickers and factsheets for select indices.
Data Distribution
Index subscribers may choose to receive index data in files. Files may include:
● Index level and/or constituent level returns and characteristics for any indices
● Automatic delivery of files via email or SFTP following the completion of the index
production process after market close
● Clients may receive standard files or may customize file contents
Index data is also available via authorized redistributors.
Index Licensing
Bloomberg requires index data licenses for services and products linked to the Indices.
107
106
https://www.bloomberg.com/indices
107
This includes index and constituent-level redistribution, bond pricing service, Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), index-linked insurance
products, mutual funds, OTC derivative products, and custom index solutions.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 63
Appendices
Appendix 1: Total Return Calculations
Figure 1
Components of Total Return Calculations
Where:
P
b
= beginning price
A
b
= beginning accrued interest
P
e
= ending price
A
e
= ending accrued interest
Outstandb = balance outstanding at beginning of period IntPayment: Interest payment during period
Outstand
e
= balance outstanding at end of period
PrincPayment: Principal payment during period
MV
b
= beginning market price (P
b
+ A
b
)
For CMBS Bonds Only:
PrincWritedown: Principal lost during period
PrepayPrem: Prepayment premium
For All Security Types:
For CMBS Bonds Only:
Price Return
The return derived from price changes due to movements in
interest rates, volatility, credit events and other factors.
Monthly price return = (Pe – Pb) / MVb
Writedown Return
The return related to the reduction in the par outstanding due to
a loss of principal. The principal loss is valued at the ending
price of the bond.
Monthly Writedown Return =
[(PrincWritedown/Outstand
b
) * (P
e
+ A
e
)] / MV
b
Coupon Return
The return derived from the interest payment actually made on
the certificate. In the case of an interest shortfall, the actual
interest payment received will be less than the expected coupon
payment.
Monthly coupon return = [(Ae – Ab) + IntPayment] / MVb
Prepayment Premium Return
The return due to additional penalty premiums paid in
connection with certain prepayments. The premiums are
generally distributed as excess interest on the certificates.
Monthly Prepayment Premium Return
=[(PrepayPrem/Outstandb)*100 ] / MVb
Paydown Return
The return related to scheduled and unscheduled payments of
principal.
Monthly Paydown Return =
[(PrincPayment/Outstandb) * (100 - Pe - Ae)] / MVb
Currency Return (see Appendix 3 for more details)
The return derived from converting local returns to a base-
reporting currency different from the underlying currency of the
security. If the underlying and reporting currencies are the same,
the currency return is zero. Currency returns can be hedged or
unhedged.
Monthly Currency Return (Unhedged) = % change in spot *
(1+local return)
Local Return = price return + coupon return + paydown return
Monthly Currency Return (Hedged) =
Expected Currency Return + Residual Currency Return
● Expected Currency Return = Relative Forward Rate
Differential * (1 + Expected Local Return)
● Relative Forward Rate Differential = (Forward Rate – Spot
Rate) / Spot Rate
● Expected Local Return = (1 + Yield beginning/2)
(1/6)
- 1
● Residual Currency Return = (% change in spot) * (Local
Return – Expected Return)
● Local Return = price return + coupon return + paydown
return
● Exchange Rate = base currency / local currency
● Forward Rate = Spot rate beginning * (1 + One Month Base
Depo) / (1 + One Month Local Depo)
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 64
Total Return =
Price Return + Coupon Return + Paydown Return + Currency
Return + Writedown Return (CMBS Only) + Prepayment Premium
Return (CMBS Only)
Figure 2
Market Value Security Weight Calculations
Where:
P
b
= beginning price
A
b
= beginning accrued interest
Outstand
b
= bond outstanding at beginning of period
RU = Returns Universe of a bond index
MV
b
= beginning market price (Pb + Ab)
MarketValue
b
= beginning of period market value = MV
b
*
Outstand
b
RU Market Value Weight in % =
=
(
)
(
)
Figure 3
Index Return Calculations
Index Total Return MTD = ∑ (Bond Weight * Bond Total Return MTD)
Index Excess Return MTD = ∑ (Bond Weight * Bond Excess Return MTD)
Where:
Bond Weight = % security contribution to Returns Universe using market value weights or other index weighting schemes
Bond Return = security-level return (total, excess, etc.) since last index rebalancing.
Figure 4
Cumulative Index Returns (Periodic and Since Inception) and Index Values
Since Inception Total Return (SITR)
Cumulative total return since inception indexed to zero
SITR = [(100 + SITR
BOM
) * (1 + TR
MTD
)] - 100
Where:
IVB = beginning of period Index Value (SITR + 100)
IVE = end of period Index Value (SITR + 100)
Since Inception Price Return (SIPR)
Cumulative price return since inception of the index
Periodic 3 Month
Rolling 3-month total returns = [IV
E
/ IV
B
) * 100] – 100
Since Inception Coupon Return
Cumulative coupon return without reinvestment, a
linking of an index’s MTD coupon return
Periodic 6 Month
Rolling 6-month total returns = [IVE / IVB) * 100] - 100
Since Inception Other Return
Cumulative paydown and currency return, linking an
index’s MTD other return
Since Inception Coupon with Reinvestment
Cumulative coupon return with reinvestment
= SITR – SIPR – Inception Other
Index Value (IV)
Cumulative total return since inception indexed to 100.
IV = SITR + 100
Example of Periodic Return Calculations
Calculating a cumulative return over a specific time interval Example: Global Aggregate Index for the calendar year 2012
1. Divide the ending index level (December 31, 2012) by
the beginning index level (December 31, 2011)
465.98/446.69 = 1.04318
2. Multiply by 100
1.04318 * 100 = 104.32
3.
Subtract 100 104.32 – 100 = 4.32
Annualizing a return from cumulative returns
Example: Global Aggregate five-year annualized return
(December 31, 2012)
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 65
1. Divide the end index level (December 31, 2012) by the
beginning index level (December 31, 2007)
465.98/357.53 = 1.30308
2. Take the nth root (1/n power, n is the number of years) of
the result
(1.30308)
1/5
= 1.05437
3. Subtract 1 and multiply by 100
(1.05437 – 1) * 100 = 5.44
Total Return Calculations (Series-B Indices)
The calculation methodology outlined below applies to the Series-B indices, which includes flagship inflation-linked indices, such
as the WGILB, EGILB and EMGILB, and the government bond family, such as the Euro, UK and US Government Bond Indices and
the US and Euro Term Indices. While Series-B and Series-L indices use similar methodology for total return calculation, they differ in
terms of settlement conventions. Series-B indices use standard local settlement and ex-dividend conventions for all calculations,
whereas Series-L indices use T+1 settlement universally, except US MBS pass-throughs, which use a same day (T+0) settlement
assumption.
The Series-B Indices’ returns are calculated daily, starting with a base value of 100 on the base date.
Figure 5
Notation Used in Index Formulae:
= cash clean settlement price of bond i at close of day t. Pertains to the inflated price for linkers
= accrued interest for settlement of bond i for trading on day t
= cash clean settlement price of bond i at close of day b
= cash accrued interest for settlement of bond i for trading on day b. Pertains to the inflated accrued amount for linkers
t = business day on which the index is being calculated
b = last business day of the previous month
= cash held on day t where
( )
∑
+=
−
i
tititt
NCCHCH
,,1
*
. Cash held is reset to zero on date b
= amount outstanding of bond i on day b. This is not inflation-adjusted, but the nominal face value
= coupon paid on bond i on day t
= any ex-dividend coupon that will be received on bond i
= gross redemption yield on bond i at the close of day t
= the duration of bond i at the close of day t
( )
bi
tititit
i
NXAPm
,
,,,,
*++=
= market value of bond i on day t in cash terms
The notation is intended to show a summation occurring over bonds i that are eligible for the index on day t
Hence, would apply to the eligible list on day b
t
i
P
,
ti
A
,
bi
P
,
bi
A
,
t
CH
bi
N
,
ti
C
,
ti
X
,
ti
Y
,
ti
D
,
∑
i
ti
x
,
∑
i
bi
x
,
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 66
Figure 6
Market Capitalization
The total market capitalization, M
t
, of all the constituent bonds on day t is given by:
Figure 7
Clean Price Index
The Clean Price Index ( ) is defined as:
The CPI is calculated daily as shown above for all index-eligible bonds.
Figure 8
Gross Price Index
The Gross Price Index ( ) is analogous to the clean price index and is defined as:
Figure 9
Total Return Index
The Total Return Index ( ) is calculated as:
Figure 10
Daily Total Return
Daily total return between two days, t-1 and t, is calculated as:
=
1
∑
=
i
tit
mM
,
t
CPI
( )
( )
∑
∑
=
i
bibi
i
biti
bt
NP
NP
CPICPI
,,
,,
*
*
*
t
GPI
( )
( )
∑
∑
++
++
=
i
bib
ibibi
i
bit
ititi
bt
NXAP
NXAP
GPI
GPI
,,,,
,,,,
*)
(
*)(
*
t
TRI
( )( )
( )
∑
∑
++
+++
=
i
b
ibi
bibi
i
tbitititi
bt
NXAP
CHNXAP
TRITRI
,,,,
,,,,
*)(
*
*
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 67
Appendix 2: Index Rules for Currency Hedging and Currency Returns
Investors frequently ask how to hedge portfolio positions so as to best match index currency
exposures. We discuss the currency aspects of index return calculations, with special emphasis
on the procedure used in currency-hedged indices. The following section details rules for
Series-L indices.
Unhedged Returns
Consider an investor who buys foreign currency at the beginning of the month and sells the
position back into base currency at the end of the month. The realized capital gain from this
investment in foreign currency is:
=
(1)
FXbeg and FXend are the base currency values of one unit of the foreign currency at the
beginning and the end of the return period, respectively.
Consider an investor who buys a bond denominated in a foreign currency at the beginning of
the month and, at the end of the month, sells the bond and converts the foreign currency
proceeds back into the base currency. The investor’s (base-currency) realized return on
investment is:
=
(
1 +
)
(
1 +
)
1 (2)
= + +
(
)
( )
To keep analytics as intuitive and tractable as possible, Bloomberg decomposes index returns
into additive components. Accordingly, currency return
108
is defined as follows:
= (3)
where:
= + +
Currency return is the difference between base-currency return and local return. Substituting
Equation (2) into Equation (3) provides:
= +
(
)
( ) (4)
=
(
1 +
)
( )
The currency return on the bond is not equal to the capital gain on a pure currency investment.
From Equation (1), the base currency capital gain on a pure currency investment is FX
Appreciation, while the bond’s currency return is FX Appreciation + (local return) * (FX
Appreciation). The bond’s currency return contains an interaction component (local return) * (FX
Appreciation) in addition to the capital gain on a currency investment.
Example: Unhedged Returns
Consider an index with the euro as the base currency and which contains the USD-
denominated
PEMEX bond described in Figure 17. The local return on this bond in April 2013 was 3.50%. The
total euro return on an unhedged position in this bond was 0.81%. From Equation (3), the index
currency return for an unhedged position in this bond was 0.81%-3.50%, which equals -2.69%.
The currency return on this bond can also be calculated from Equation (4). In this case, the
EUR/USD exchange rate was 1.2841 at the beginning of April and 1.3184 at the end of April. Thus,
108
The Bloomberg Indices source FX spot and forward rates from Refinitiv. FX rates are taken at 4pm London time.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 68
the value of one US dollar fell from 0.778756 euros at the start of April to 0.758495 euros at the
end of April.
109
Here FX Appreciation is (0.758495 - 0.778756)/0.778756 or -2.60%. During April, the US dollar
lost 2.60% of its value when measured in euros. From Equation (4), the currency return is
(1.0350) (-0.0260), which equals -2.69% and matches the previous currency return calculation.
The difference between the -2.60% euro return for investments in US dollar cash and the -
2.69%
currency return on the PEMEX bond is 9bp, which exactly equals the value of the interaction
term: (0.0350)*(-0.026).
Finally, the base currency total return for the PEMEX bond can be calculated directly from
Equation (2). In the current example, the product of (1 + local return) and (1 + FX Appreciation) is
(1.0350) (0.9740), which comes to 1.0081. Subtracting one provides the bond’s 0.81% total return
in euros.
Figure 17
Unhedged Index Return for April 2013: PEMEX 4.875% Coupon
Maturing January 24, 2022
Price Return
3.14%
Coupon Return
0.36%
Paydown Return 0.0%
Local Return
3.50%
Currency Return
-2.69%
Total Unhedged Return in EUR
0.81%
EUR/USD Spot March 31, 2013
1.2841
EUR/USD Spot April 30, 2013
1.3184
FX
beg
0.778756
FX
end
0.758495
FX Appreciation
-2.60%
Currency Return
-2.69%
=(1.0350)* (-0.026)
Total Return (Unhedged) in EUR
0.81%
=(1.0350)* (1 - 0.0260) - 1
Sample Implementation: Unhedged Returns
Figure 18 provides the set of actual transactions that an investor could use to generate the
unhedged index return for the PEMEX bond in April 2013. The only potential discrepancy
between the investor’s realized euro return from these transactions and the index euro return is
the investor’s inability to ensure that trades are executed exactly at index prices.
To replicate the index return, the investor uses 86.759 euros to buy 111.407 dollars at the spot FX
rate at the close of business on March 31. The US dollar proceeds are used simultaneously to
purchase the PEMEX bond. At the close of business on April 30, the investor sells the PEMEX
bond and, in return, receives 115.314 dollars, which is simultaneously sold in the spot FX market
for 87.465 euros. These transactions result in a euro return of 0.81%.
Hedged Returns
Now consider the currency-hedged version of the index containing the PEMEX bond. For
currency-hedged indices, as well as unhedged indices, the currency return satisfies the relation:
=
One can verify this using the numbers in Figure 19. The Bloomberg Indices report a currency-
hedged total return of 3.40% (EUR) for this bond. Subtracting the 3.50% local return comes to -
109
These values are arrived at by taking the reciprocal of the quoted exchange rate.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 69
0.10%, which equals the reported currency return for the bond in the currency-hedged version
of the index.
While the definition of cur
rency return remains unchanged, the calculation of base currency total
return becomes somewhat more complicated for currency-hedged indices. The index position
in a bond denominated in a foreign currency for a hedged index is actually a position in two
instruments: the bond plus a one-month currency forward:
(
)
(5a)
=
(
)
+ ( )
where:
base currency total return (unhedged) is provided in Equation (2)
H is the size of the hedge measured in local currency.
=
(5b)
Forward Value is the number of base currency units to be received for each unit of the local
currency delivered in the forward contract. This value is set in the marketplace at the beginning
of the month and received at delivery at the end of the month.
Equation (3) can be used to re-express as follows:
(
)
(6)
= +
(
)
+ ( )
Note that the second term on the right hand side of Equation (6) moves in the opposite
direction as the third term. If the hedge were perfect, these terms would reduce to a constant
and remove all sensitivity to the exchange rate at the end of the month.
Equation (5a) is general. It provides the base currency total return under any hedging rule. By
setting H according to index rules, Equation (5a) becomes a full specification of base currency
total return for Bloomberg Indices.
For securities other than mortgages, Bloomberg indices set H as follows:
= (1 + /2)
(/)
(7)
H is a projected end-of-month market value per unit of local currency invested at the beginning
of the month. In Equation (7), local-currency security value is projected to grow at the rate
implied by its yield. For non-bullet bonds, Equation (7) uses yield to worst.
The perfect currency hedge for the April return would set H equal to the bond’s end-of-April
local-currency value. However, the perfect hedge could not be obtained by an actual investor at
the beginning of April: the local currency value of the index at the end of April is not known on
March 31, when the hedge must be implemented. Index construction always stresses the
importance of investability. In this spirit, the index does not use end-of-month values in
determining the currency hedge. The yield in Equation (7) is the yield at the beginning of the
month.
Returning to the PEMEX 4.875% coupon bond, Figure 20 reports that the yield on this bond at
the beginning of April was 3.481% and that 0.778598 euros will be received for every US dollar
delivered in current 1m currency forwards. Therefore, H is 1.00288, and the forward return is
2.581%. Using these values in Equation (5a), together with the bond’s 0.81% unhedged base-
currency return, results in 3.40%, the bond’s currency-hedged total euro return.
Figure 18
Unhedged Returns, Implementation for April 2013: PEMEX 4.875% Coupon Maturing January 24, 2022
March 31
April 30
Price 110.500 114.000
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 70
Accrued Interest
0.907
1.314
EUR/USD Spot 1.2841 1.3184
Value of one USD in EUR 0.778756 0.758495
Transaction
EUR
USD
FX Rate
Comment
March 31
Initial EUR Balance 86.759
Purchase USD at Spot
-86.759
111.407
0.778756
USD Cash Price = 110.500 + 0.907
Cost in EUR = (0.778756)*(USD Cash
Price)
Purchase Bond
-111.407
April 30
Sell Bond
115.314
0.758495
USD Cash Price = 114.000 + 1.314
Sell USD into EUR
87.465
-115.314
Final EUR Balance 87.465
Total Return (Unhedged EUR) 0.81%
(EUR Proceeds/
Initial EUR Investment) - 1
Figure 19
Hedged Return for April 2013: PEMEX 4.875% Coupon Maturing January 24, 2022
Price Return
3.14%
Coupon Return
0.36%
Paydown Return 0.00%
Local Return
3.50%
Currency Return
-0.10%
Total Hedged Return in EUR
3.40%
Yield (March 31, 2013)
110
3.481%
Hedge Magnitude per dollar invested (H)
1.00288
= (1 + (3.481%/2))(1/6)
EUR/USD Spot March 29, 2013
1.2841
EUR/USD Spot April 30, 2013 1.3184
1-Month Forward Value in EUR of one USD 0.778598
FX
beg
0.778756
= 1 / (1.2841)
FX
end
0.758495
= 1/(1.3184)
FX Appreciation
-2.60%
= (0.758495 – 0.778756) / (0.778756)
Forward Return 2.58% = (0.778598 – 0.758495) / (0.778756)
Total Hedged Return in EUR
3.40%
= 0.81% + (1.00288) * (2.581%)
Expected Currency Return
-0.02%
= (1.00288) * (0.778598 – 0.778756) / (0.778756)
Residual Currency Return
-0.08%
= (1 + 3.40% - 1.00288) * (-2.60%)
Currency Return (Total)
-0.10%
= -0.02% + -0.08%
For each currency, the hedge for the entire index is the average of security hedges weighted by
the beginning-of-the-month index weight. Thus, the hedge for the April index return is the
weighted average of the individual April security hedges using security market weights from the
beginning of April.
For individual securities, the following equation can also be used to calculate currency returns
according to hedged index rules:
110
Yield is the Bloomberg published Yield to Worst for each security.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 71
From Equation (5a), currency return (hedged) is the sum of currency return (Unhedged) and
H*(Forward Return).
(
)
=
(
)
+
(
)
This is shown as below from Equation (4) and Equation (5b).
(
)
=
(
1 +
)
(
)
+
=
(
1 +
)
(
)
+
Therefore,
=
+
(
1 +
)
(
)
(8)
All of the components of the first term in Equation (8) are known at the time the hedge is
implemented. This first term is often referred to as the carry from the hedge. In the PEMEX
example, its value is (1.00288) * (0.778598 – 0.778756) / (0.778756), or 2.0bp.
Since index hedges are designed to be implementable by investors at the beginning of the
month, they are not perfect: the bond will have residual currency exposure in the index after
hedging. This residual currency exposure is equal to the difference between the size of the
hedge and the market value of the security at the end of the month. The FX appreciation
realized by this exposure is
measured by the second term in Equation (8). The exact value of this
term will not be known until the end of the month. In our example, this term is (1.0340 -
1.00288)
* (-2.60%), which equals -8.1bp. These two terms sum to the reported -10bp currency return for
the bond in the hedged index. While 10bp is a fairly large magnitude for a hedged currency
return, it is less than one-twentieth the size of the unhedged currency return.
Figure 20
Hedged Returns, Implementation for April 2013: PEMEX 4.875% Coupon Maturing January 24, 2022
March 31
April 30
Price
110.500
114.000
Accrued Interest 0.907 1.314
EUR/USD Spot
1.2841
1.3184
Value of one USD in EUR
0.778756
0.758495
Yield
3.481%
3.037%
1-Month Forward Value in EUR of one USD
0.778598
Projected Growth in Local Bond Value over
Coming Month
0.288%
Transaction
EUR
USD
FX Rate
Comment
March 31
Initial EUR Balance
86.759
Purchase USD at Spot
-86.759
111.407
0.778756
USD Cash Price = 110.500 + 0.907
Cost in EUR is (0.778756) * (USD Cash
Price)
Purchase Bond -111.407
Sell 111.728 One-Month Dollars
(111.407) * ( 1.00288) = 111.728
April 30
Sell Bond
115.314
USD Cash Price = 114.000 + 1.314
Close Forward Contract
86.9912
-111.728
0.778598
Sell Residual USD into EUR
2.720
-3.586
0.758495
Final EUR Balance
89.711
Total Return (Hedged EUR) 3.40%
(EUR Proceeds / Initial EUR
Investment) - 1
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 72
End-of-Month Roll of Currency Hedging Positions
A statistic, hedge market value, is available to help investors who wish to match index hedging
procedures. Hedge market value applies index currency hedging rules to determine the one-
month hedge for the position. These hedges are calculated based on market values from the
current close of business. Hedge market value provides the hypothetical hedge that the index
would implement today for a position of this magnitude if the current day were a month-end.
At the actual month-end, hedge market value reports the exact hedge that the index would use
to hedge the position over the upcoming month. Prior to month-end, hedge market value can
be viewed as an approximation of the hedge to be implemented at the beginning of the next
month. This approximation becomes mor
e precise as the month progresses and becomes exact
at the actual month-
end; it is designed to help investors roll forward their currency hedges at the
end of the month.
Using Hedges of Longer Tenors
For many global investors, the amounts that need to be hedged in each currency are fairly
stable from month to month. Therefore, although the index hedges with one-month currency
forwards, many investors choose to use three-month contracts. While the use of three-month
currency forwards introduces tracking error relative to a currency-hedged benchmark, these
investors are willing to bear the tracking error for a variety of reasons. One justification is the
perception that rolling a hedge four times a year in the three-month market entails lower
execution costs than rolling the position twelve times a year in the one-month market. Another
possible motivation, depending on the shapes of the two forward curves, is that the hedging
cost (which is based on the deposit rate differential) can sometimes be significantly lower at
longer tenors. While such strategies may add value, investors need to be aware that by
extending the tenor of the hedge, they are essentially adding a view on short-term interest rates
to their portfolios.
Common Questions about Currency Returns for Bloomberg Indices
Q: Why aren’t unhedged currency returns exactly the same for all bonds denominated in a
given currency?
A: All bonds in a given currency will be subject to the same
change in FX rates, which is denoted
as FX Appreciation in this article. However, because Bloomberg expresses currency returns
using an additive convention, the reported currency return also depends on the local return of a
bond, as shown in Equation (4). Thus, different bonds (or indices) denominated in the same
currency can have different currency returns.
Q: Why do hedged indices have currency returns? Isn’t the currency risk hedged away?
A: Hedging can eliminate the majority of currency risk, but there is no way for foreign investors
to earn exactly the same return as local investors, for two reasons. First, there is no way to know
at the beginning of a month exactly what the market value of a given investment will be at the
end of the month. The amount by which the size of the hedge is different from the ultimate end-
of-month market value (either too big or too small) results in a (usually small) exposure to
changes in FX rates. Second, even if we assume that the hedge is set up in exactly the right size,
there is a carry component (which can be either positive or negative) that corresponds to the
difference between spot and forward rates.
The carry is proportional to the difference between the short-term deposit rates in the two
currencies. One will pay up to shift cash to a higher-yielding currency on a hedged basis; this
negative carry is sometimes referred to as the cost of the hedge. A shift to a lower yielding
currency on a hedged basis will yield a positive carry, essentially compensating the investor for
the extra yield that has been foregone.
Both of these components of hedged currency return are seen explicitly in the formulation of
Equation (8), in which the first term corresponds to the carry and the second to the FX return on
the market value that remains unhedged.
Q: How is the size of the hedge determined in Bloomberg Indices?
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 73
A: The size of the hedge is not assumed to be the ending market value, which cannot be known
at the start of the month. It is also not assumed to be the beginning market value, since this
would result in a systematic bias toward under-hedging. Bloomberg uses a simple projection of
end-of-month market value based on the combination of beginning-of-month market value and
yield.
Q: How are hedged returns calculated intra-month?
A: To calculate intra-month hedged returns, Bloomberg assumes that the FX forward contract is
unwound using a prorated forward rate. A 30-day contract is assumed for every month
regardless of the actual number of days in a month.
111
Q: What are the differences between Series-L and Series B currency hedging
methodologies?
A: The precise hedging methodologies used to calculate hedged returns for both the Series-L
and Series-B indices are very similar but some slight nuances do exist that would result in small
differences in returns between Series-L and Series-
B indices if one were to compare the hedged
returns for the same index. The most significant difference is that the Series-L indices use
projected month-end market values to calculate the amount to be hedged for the forthcoming
month, whereas the Series-B indices simply use the beginning of month market values or as it is
sometimes labelled the ‘Current Value’ method. All things being equal, the difference between
the projected market value and the beginning of month market value is likely to be marginal,
but when comparing with Series-B hedged returns for the same index, this methodological
difference between the market values is likely to be the most significant source of tracking error.
Derivation of Hedged Market Value (Series-L)
Projected end-of-month market value versus beginning-of-month market value for hedged
amount:
Forward rate agreements are entered into for the projected end-of-month market value of
Series-L indices, using the beginning-of-month bond yield.
(
)
= (1 +
2
)
(
)
Derivation of Hedged Market Value (Series-B)
For Series-B indices, forward rate agreements are entered into only for the beginning-of-month
market value. Any subsequent appreciation or depreciation in the value of the index is
unhedged until the next hedge is taken out.
One other methodological difference worthy of a mention is the different methods used to
calculate intra-month hedged values. The two index series use a slightly different method of
interpolating the intra-month forward rate for intra-month hedged index statistics.
Method of Interpolating Intra-Month Forward Rate (Series-L)
The prorated forward rate used by Series-L indices to unwind a FX forward contract on an intra-
month day i is an interpolation between the spot (
) and 1-month forward rates (
,
) at the
beginning of the month. A 30-day contract is assumed for every month regardless of the actual
number of days in a month.
=
+
,
×
30
111
To calculate the number of days for which the forward contract is unwound, users need to account for the T+1 calendar day settlement assumption of the indices (T+0
for mortgages). Using such an assumption intra-month means that the day count as of a Friday business day will not include the weekend days. The unwind of the
forward contract will account for those days on the first business day after the weekend.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 74
Method of Interpolating Intra-Month Forward Rate (Series-B)
The interpolated forward FX rate for Series-B indices on an intra-month day i is calculated by
linear interpolation between the spot (
) and 1-month forward rates (
,
) on day i. Actual
number of days are used for Series-B index hedging calculations.
=
+
,
×
Currency Returns and Hedging for Series-B Indices
Returns for Bloomberg Series-B inflation-linked and government indices are also available in
foreign currency and hedged versions. For Series-B indices, Bloomberg uses a current value
methodology. This method hedges only the market value in each of the currencies at the
beginning of each month, after any reweighting of the index constituents, and does not assume
perfect foresight. As a result, there will be an element of currency mismatch at the end of the
month if the value of the portfolio holdings in the currency changes.
112
The following section provides a detailed explanation of how foreign currency and hedged
versions of index are calculated for Series-B indices.
Unhedged and Hedged Return Indices
Foreign Currency: Total Return Index (Unhedged)
The foreign currency versions of the local currency index are calculated using the local index
and the spot foreign exchange rate between the local and “foreign” currencies. The formula
below is used to calculate the Foreign Total Return Index. The same technique is used to
calculate the associated clean and gross price indices.
TRI
,
= TRI
,
×
S
,
S
,
Where:
,
- Foreign Total Return Index at time t
,
- Local Total Return Index at time t
,
- Spot exchange rate between local and foreign currency on day t
,
- Spot exchange rate between local and foreign currency at commencement date of the
index.
Hedged Return Calculations
The index uses the current value method to execute a one-month hedge at the beginning of
each calendar month. One-month forward rate agreements are entered into for the full market
value of the index at the beginning of each month. Any subsequent appreciation or depreciation
in the value of the index is unhedged until the next hedge is taken out.
Single Currency Index Hedge
The hedged return on a single currency index or portfolio can be viewed as consisting of three
parts:
● Local return
● Currency return on the unhedged portion of the fund
● Profit or loss on the hedge itself
112
Bloomberg Indices use Refinitiv: WM/Reuters Closing Spot and Forward Rates mid values at 4pm London time for both Series-L and Series-B indices. If the last
calendar day of a month is a non-business day, the FX rates correspond to the previous business day.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 75
Multi-Currency Index Hedge
In an index, income is reinvested across all the bonds in proportion to their weight. This takes
place as soon as income is received; hence, the weight will depend on the local market price
and, in the case of a multi-currency basket, on the currency cross rates. Given this reinvestment
strategy, we cannot observe the local currency return in the same way as described above.
Instead, we use a simpler breakdown:
Index return (in the desired currency)
Profit or loss on the hedge itself (or in this case, on a series of currency hedges)
Calculating a Daily Hedged Index
To provide a daily estimate of the performance of the Monthly Hedged Index, the currency
hedge is marked to market daily. This is done by unwinding the forward position and adjusting
the return on the hedge. The hedge return is then combined with the month-to-date local
currency return and the unhedged currency return to give an overall month-to-date hedged
index return and, hence, the hedged index level.
As stated above, this is a daily estimation of the Monthly Hedged Index, not a
true Daily Hedged
Index. This is to provide continuity between the monthly and daily hedged total return series.
Pricing the Offsetting Forward
To mark the initial one-month forward position, we use an offsetting forward to the end of the
month. This is more precise than using the spot rate because it takes into account expected
interest rate differentials for the remainder of the month.
The easiest way to explain this is to look at an example. Suppose we are 10 days into the month
and that the last business day of this month is the 28th. We would need to offset the starting
one-month forward with an 18-day forward (i.e., 28 – 10 = 18 days). In theory, we could obtain an
18-day rate directly for the forward market; in practice, only certain periods (tenors) are quoted,
and we need to interpolate to arrive at a rate for the desired period.
For the sake of simplicity, we use a linear interpolation based on the current one-month forward
and spot rates. In our example, we calculate the 18-day forward rate as the
current spot rate plus
the premium or discount between spot and 1m forward prorated for 18 days.
Formulae for Monthly Calculation: Single Currency Index
= =
,
,
1
= =
,
,
1
= =
,,
,
1
=
(
1 +
)
×
=
= + +
= ×
(
1 +
)
Where:
– Start date
– End date
– Local Currency Total Return Index
– Spot foreign exchange rate between local currency and the hedge currency
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 76
,
– One-month forward foreign exchange rate between local currency and the hedge
currency.
Formulae for Daily Calculation: Single Currency Index
= =
,
,
1
= =
,
,
1
= =
,,
,
1
=
(
1 +
)
×
=
,
,,
1
= +
= +
(
1 +
)
× +
= ×
(
1 +
)
Where:
– Intra-month date;
– Remaining days in hedge;
,,
– Interpolated forward FX rate between local currency and hedge currency on day i for
forward period R. This is calculated by linear interpolation between the spot rate
,
and the
one-month forward rate
,,
where 1 < R < 1M.
,,
=
,
+
,,
,
×
Where:
,
– Spot foreign exchange rate between local currency and the hedge currency on day i;
,,
– One-month forward foreign exchange rate between local currency and the hedge
currency on day i;
– Remaining number of days in the month (including holidays and weekends except at month-
end);
– Actual number of calendar days in the month.
113
Formulae for Monthly Calculation: Multi-Currency Index
=
,
,
1
=
[
,
×
,,
,
,
]
= + =
,
,
1 +
[W
,
×
,,
,
,
]
= ×
(
1 +
)
Where:
113
When the last calendar day of a month falls on a weekend, the last weekday is treated as the last day of the month for calculations:
R = last weekday of the month - current day
M = last weekday of the month - first calendar day of the month (regardless whether it is a weekend or not).
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 77
– Start date
End date
,
Unhedged Total Return Index in hedge currency
– Spot FX rate local currency into hedge currency
,,
– One-month forward FX rate local currency into hedge currency on day b
,
– Weight of each local currency index on day b in the Multi-Currency Index:
,
=
,
×
,
(
,
×
,
)
Formulae for Daily Calculation: Multi-Currency Index
=
,
,
1
=
[
,
× (
,
,
1)]
=
[
,
× (
,,
,
1)]
=
[
,
× (
,
,,
1)]
= +
= +
= × (1 + )
Where:
– Intra month date
– Remaining days in hedge
,,
R period Forward FX rate local currency into hedge currency on day i
,
– Weight of each local currency index on day b in the Multi-Currency Index:
,
=
,
×
,
(
,
×
,
)
Appendix 3: Detailed Discussion of Excess Return Computations
The fixed income community generally gauges the compensation for holding risky assets by
measuring performance of spread product asset classes relative to the treasury asset class. It
follows that for an individual security, a portfolio or an entire asset class, excess returns offer a
more pure measure of this compensation than nominal returns.
While many different excess return calculation methodologies exist, the differences mainly
reflect the various ways to define an equivalent treasury position. The simplest technique
compares the return of a spread sector security to the closest on-the-run Treasury, while more
precise methods require the equivalent Treasury position to match the duration of the spread
security. One of these more precise methods, known as the duration-bucket approach,
calculates an equivalent Treasury return for each duration neighborhood and bases the excess
return calculation on the average returns on Treasuries and spread sectors partitioned into semi
-
annual duration cells. Since the duration of a security does not fully reflect its yield curve
exposure, particularly for securities with embedded optionality, such as callable bonds or MBS,
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 78
an even more precise method is to fully characterize each security’s exposure along the curve
using a set of key rate durations (“KRDs”). Then its return can be compared with that of a
hypothetical Treasury portfolio with the same KRD profile.
The following discussion details how key rate durations are calculated and used to construct
equivalent treasury positions, which are then used to compute excess returns for US securities.
The duration-bucket approach, which is used for non-US securities, is also discussed. The
precise excess return computations are then complemented with an intuitive approximation
based on option adjusted spread (OAS), which explains how to properly weigh portfolio level
spreads and spread changes to allow aggregated analytics to be used in excess return
approximations.
Using Key Rate Duration to Compute Excess Returns
The US Treasury off-the-run yield curve is modeled daily by fitting a smooth discount curve to
the prices of US Treasury securities. In addition, a term structure of volatility is fitted to a selecte
d
set of caps and swaptions. These fitted curves serve as the basis for the Bloomberg OAS
models: a lognormal tree model for government and corporate securities and a Monte Carlo
simulation model for mortgage backed securities. In both models, sensitivities to changes in
interest rates are measured by shocking the yield curve by a fixed amount, keeping volatility
constant and repricing each security at a constant OAS. This mechanism is used to calculate
option adjusted durations as sensitivities to a parallel shift in the Treasury par curve.
Key rate durations are sensitivities to the movement of specific parts of the par yield curve. The
movements of the par yields at six key points along the curve (6 months, 2 years, 5 years, 10
years, 20 years and 30 years to maturity) are assumed to capture the overall movement of the
yield curve. In other words, sensitivities of a security to these six yields summarize its exposure to
yield curve movements. To compute these sensitivities, or KRDs, the yield curve is perturbed by
applying a change in the par yield curve around each of these points, one at a time, and re-
pricing the bond at a constant OAS. The sum of the six key rate durations is approximately equal
to the option adjusted duration, while the distribution of the bond’s duration among the six
KRDs gives a more detailed view of how it will respond to different types of yield curve moves.
Calculating Excess Returns Using KRDs
To calculate excess returns using KRDs, Bloomberg first constructs a set of six hypothetical par
coupon treasuries corresponding exactly to the maturities of the six KRDs of a spread security at
the beginning of the month. To the six hypothetical bonds, each priced exactly off the curve at
zero OAS, a riskless one-month cash security is added. A combination of these seven securities
is then used to match the market value and KRD profile of the security at the beginning of the
month. This combination constitutes the equivalent treasury position to which a security’s return
is compared. The KRD-matched hypothetical treasuries are held constant throughout the month
and not rebalanced intra-month due to change in the KRD profile of the security to which it is
being compared. At month-end, each of the hypothetical par coupon treasuries is re-priced at
zero OAS off the end-of-month treasury return, and its total return for the month is calculated.
The excess return for the security is then calculated as the difference between its total return and
that of the equivalent treasury position.
Duration-Bucket Approach
A duration-bucket approach is used to calculate excess returns for non-US benchmark indices.
Using this methodology, Bloomberg first buckets the universe of treasuries that correspond to a
bond’s currency denomination
114
into half-year duration buckets starting at zero. Treasuries are
bucketed based on their beginning-of-month duration values and will not change buckets intra-
month. A market value weighted return is then calculated for each half-year duration bucket.
The return for a given security’s duration-matched risk-
free asset is interpolated from its duration
at the beginning of the month and the duration and total return of the two adjacent treasury
114
For EUR-denominated securities, this basket is comprised of German bunds only. Prior to July 1, 2013, the basket also included French and Dutch treasuries.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 79
buckets. The excess return for the security is then calculated as the difference between its total
return and the interpolated return.
115
Approximating Excess Returns from OAS
OAS-Based Excess Return Calculation
As discussed previously, no excess return methodology has been standardized in the fixed
income market. For the basis of comparison, we use a simple approximation based on sources
of excess return for a spread product to derive excess returns at the index level. Securities
considered riskier than treasuries usually earn a spread over treasury yields; when the spread
remains u
nchanged, the excess return should be approximately equal to the spread itself. When
spreads change (and the risk of spread securities is realized), the additional excess return is
given by the change in spread multiplied by the spread duration.
Let:
i
ER
= The excess return of bond i
i
S
= Option adjusted spread (“OAS”)
i
D
= Spread duration
i
S∆
= Monthly change in OAS
Our simple first-order approximation for monthly excess return is given by
(1)
i
i
i
i
SD
S
ER ∆≈ -
12
The simplicity of this approximation might lead one to ask why this should not be adopted as
the official Bloomberg definition of excess return. The simple model does not cover all possible
sources of return differences between treasuries and spread product, however. For example,
called bonds generate excess return due to volatility changes, even with an unchanged option-
adjusted spread. Additionally, returns on mortgage backed securities are affected by
prepayment surprises and volatility changes, in addit
ion to spread moves. For these reasons, it is
important to retain a model that works in return space at the security level by subtracting an
equivalent treasury return from the total return of each spread security.
While an OAS approximation for excess return may not be rigorously correct for instruments that
are volatility sensitive, it provides intuitive results for a largely non-callable index such as the US
Credit Index.
In the application of the OAS-based approach for portfolio- or index-level excess returns, one
detail merits a closer look. It is important to pay attention to the weighting mechanism used to
compute portfolio averages. While the spread levels should be weighted by market value, the
changes in spreads should be weighted by dollar duration (the product of market value and
spread duration). A failure to do so can lead to inaccuracies when the market experiences
changes in the term structure of spreads.
For a portfolio, let w
i
represent the percentage of portfolio market value in security i. The one-
month excess return for the portfolio is then the weighted sum of the component securities’
returns:
(2)
∑
∑
∑
∆−≈=
i
iii
i
ii
i
iiP
sDw
sw
ERwER
12
115
Published excess return is set to zero for all Aaa-rated EUR treasuries.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 80
Let us look at how this calculation can be expressed in terms of portfolio level quantities. The
portfolio averages for spread duration, spread and spread change can be interpolated as
follows, where the superscript MW refers to a market weighted portfolio and the superscript
DDW denotes a dollar duration weighted average. The quantity D
P
MW
is the market weighted
average portfolio spread duration, s
P
MW
is the market weighted average portfolio OAS, and
∆s
P
DDW
is the dollar duration weighted average portfolio OAS change.
∑
=
i
ii
MW
P
DwD
(3)
∑
=
i
i
i
MW
P
sw
s
∑
∑
∆
=∆
i
ii
i
iii
DDW
P
D
w
sDw
s
The approximation for portfolio excess return given in equation (2) can be rewritten as:
(4)
DDW
P
MW
P
MW
P
P
sD
s
ER ∆−=
12
The first term of equation (2) is given by the market weighted spread. In the second term, the
duration cancels out the denominator of the duration weighted spread, leaving an expression
identical to that found in equation (2).
This weighting scheme is in accord with our intuition. The first component corresponds to the
return that will be earned by each security if its spread remains unchanged. The spread should
be weighted by market value, as are returns. The second term represents the return effect of
spread changes. Spread changes in longer securities will have a greater effect and should be
given greater weights.
Calculating Periodic and Cumulative Excess Returns
Since excess returns are the arithmetic differences between the total return of the index and a
duration-matched hypothetical risk free security, compounding monthly excess returns is not an
accurate way to display excess returns over timeframes longer than one month. But whereas
excess returns cannot be compounded, total returns can. Since Bloomberg publishes both the
total and excess returns of each index monthly, we also calculate a total return of the implied
duration-matched treasury portfolio of that index (the difference between the excess and total
returns of the index).
Mathematically, total returns of the index and the implied treasury portfolio can then be
compounded separately and compared, even as its composition is reset every month, yielding a
valid periodic excess return derived from the arithmetic differences between the two.
The following example explains the technique using a three-month horizon (January 2013-
March 2013):
Let:
TR
index
= Total Return of the Index
ER
index
= Excess Return of the Index
TR
impliedtsy
= Total Return of the Implied Duration Matched Treasury Portfolio
For any given month:
TR
index
- ER
index
= TR
impliedtsy
For the three-month horizon:
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 81
Jan13TR
index
– Jan13ER
index
= Jan13TR
impliedtsy
Feb13TR
index
– Feb13ER
index
= Feb13TR
impliedtsy
Mar13TR
index
– Mar13ER
index
= Mar13TR
impliedtsy
Over the three-month period, ending March 2013, the total return of the index would be:
ThreeMonthTR
index
= [(1 + Jan13TR
index
)*(1 + Feb13TR
index
)*(1 + Mar13TR
index
)] – 1
The total return of the implied duration-matched treasury portfolio over the same three-month
period would be:
ThreeMonthTR
impliedtsy
= [(1 + Jan13TR
impliedtsy
)*(1 + Feb13TR
impliedtsy
)*(1 + Mar13TR
impliedtsy
)] – 1
Then the compounded three-month excess return at the end of March 2013 is simply:
ThreeMonthER
index
= ThreeMonthTR
index
- ThreeMonthTR
impliedtsy
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 82
Appendix 4: Benchmark Index Pricing Methodology
This appendix describes the pricing method, timing and settlement assumptions for securities
measured in the Bloomberg benchmark indices by sector and region.
US Aggregate Index Components
US Treasury, US Agency, US Credit/Corporate (Investment Grade), US CMBS, US
Fixed- and Floating-Rate ABS
116
Indices
● Source: Bloomberg’s evaluated pricing service (“BVAL”)
● Quote Convention/Inputs: Dollar price
● Timing: 4pm New York; 2pm on early close unless otherwise noted; Prior to January 14,
2021, 3pm pricing snap was used for all bonds except taxable munis
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
All securities, including off
-the-
run bonds in the US Treasury
Index are priced daily on the bid
side by Bloomberg’s evaluated
pricing service, BVAL.
Methodology
All US Treasury bonds, including off-the-run bonds, are priced daily on the bid side by BVAL.
These Treasury marks serve as the foundation for the pricing of benchmark curves for many
other asset classes in Bloomberg Indices quoted relative to Treasuries.
US Agency bonds and US Credit/ Corporate bonds are priced by BVAL.
Corporates that are new to the
index are marked on the offer
side for their first month
-end
mark
Corporate issues that are new to the index are marked on the offer side for their first month-end
and are subsequently marked on the bid side.
US ABS and CMBS securities are marked daily by BVAL on the bid side.
US MBS Index
● Source: BVAL
● Quote Convention: Dollar price
● Timing: 4pm New York; 2pm on early close unless otherwise noted; Prior to January 14,
2021, 3pm pricing snap was used
● Frequency: Daily
● Settlement: Same-day settlement for all dates except month-
end, which is last calendar date
of the month
The US MBS Index tracks fixed-rate mortgage-backed pass-through securities issued by Ginnie
Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC). The index is composed of MBS
generics that group the larger universe of eligible agency mortgage pass-through pools
according to four main characteristics: agency, program, coupon, and vintage. The US MBS
Index used to also track Hybrid ARM pools, but this sector was retired on June 1, 2017, and the
index now only contains fixed-rate securities.
Prices for index
-eligible MBS
generics are calculated using a
US MBS Pricing Methodology
The index is formed by grouping the universe of about 1 million individual TBA deliverable fixed
-
rate MBS pools into approximately 5,500 cohorts. These cohorts are based on agency,
116
The US Fixed-Rate ABS Index is composed of the following collateral types: autos, credit cards, and stranded-cost utility (rate reduction bonds). The US Floating-Rate
ABS Index is composed of autos, credit cards, and student loans.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 83
weighted average of the
underlying pools’ prices
program, coupon, and origination year based on WALA. From this larger set of cohorts, security
type, maturity, and liquidity criteria are applied to determine which qualify for the inclusion in
the index. Beginning July 2019, the index separates the Freddie 45- and 55-day delay Freddie
generics to reflect UMBS initiative.
Specified pools have particular characteristics that differentiate them from more generic pools.
Specified pool buyers know exactly which mortgage pools they are buying and will generally
pay a higher premium over generic pools. For this reason, specified pools are excluded from
the index pricing process.
The index prices assume same-day settlement using either estimated or actual paydowns
throughout the month, depending on the day. The index reflects an estimate of paydowns
starting on the first business day of the month and the actual paydowns after the 16th business
day of the month.
For every underlying non-specified pool that maps to an index cohort, BVAL provides a T+0
price. The price of an index cohort is then calculated using an outstanding balance weighted
average of the pool prices in that cohort.
117
Other US Indices
US Corporate High Yield Index
● Source: BVAL
● Quote Convention/Inputs: Dollar prices
● Timing: 4pm New York; 2pm on early close unless otherwise noted; Prior to January 14,
2021, 3pm pricing snap was used
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
Methodology
New issues entering the US High Yield Index are marked on the offer side for their first month-
end and are subsequently marked on the bid side by BVAL. Prior to June 1, 2017, new bonds
entering the index were marked on the bid side.
US Municipal Bond Index
● Source: BVAL
● Quote Convention/Inputs: Bid side dollar prices
● Timing: 4pm New York
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-
end, which first calendar date of
following month
Methodology
The US Municipal Index is marked daily by BVAL.
117
US MBS Index Pricing Methodology and Source Changes.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 84
Pan-European Indices
Pan-European indices track multiple local currency debt markets (euro, pounds sterling,
Norwegian krona, Swedish krona, Danish krone, Hungarian forint, Polish zloty, Romanian leu,
Russian ruble, Slovakian koruna, and Czech koruna) and are mainly priced by BVAL. This section
outlines pricing procedures first for the Pan-European Aggregate Index and then for our other
Pan-European Indices, including the Euro Corporate FRN, Pan-European EM, Pan-European HY,
and the Pan-European Securitised Indices.
Euro Treasury, Euro Government (Series-B), UK Gilt (Series-L and Series-B), and
Pan-European Government-Related, Securitised
118
(Fixed Coupon) and Corporate
Indices
● Source: BVAL
● Quote Convention/Inputs: Dollar price
● Timing: 4:15pm London; 12pm London on early close unless otherwise noted
● Frequency: Daily
● Settlement:
● Series-L: Next-day settlement for all dates except month-end, which is first calendar date of
following month
● Series-B: Local settlement used for accrued interest calculation
All euro
treasuries and UK gilts
are priced daily
Methodology
All euro treasuries and UK gilts are priced daily by BVAL on the mid side. These prices serve as
the foundation for the indices’ curve generation.
All other securities are priced daily by BVAL on the bid side. Securities that are due to enter the
index at month-end are marked on the offer side.
Pan-European ABS FRN Index
● Pricing Source: BVAL
● Quote Convention/Inputs: Bid side dollar prices
● Timing: 4:15pm London
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
Methodology
Bonds are priced daily by BVAL. The prepayment/default and call assumptions are based on the
Bloomberg proprietary credit model (“BCM”). The principal and interest cash flow projections
are modelled by Bloomberg.
Other Pan-European Indices
Pan-European High Yield Corporate Index
● Sources: BVAL
● Quote Convention/Inputs: Bid side prices, new issues on the offer side
118
Securitised sectors include ABS, Pfandbriefe and other covered bonds.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 85
● Timing: 4:15pm London; 12pm on early close unless otherwise noted
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
Methodology
All bonds are priced daily by BVAL.
Euro and Sterling Treasury Bills Indices
● Sources: BVAL
● Quote Convention/Inputs:
○ Euro treasury bills: Mid side prices (bid side prior to 21 October 2011)
○ Sterling treasury bills: Bid side prices
● Timing: 4:15pm London; 12pm on early close unless otherwise noted
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-
end, which first calendar date of
following month
Methodology
All bonds are priced daily by BVAL.
Pan-European Corporate FRN Index
● Sources: BVAL; SIX Swiss Exchange for CHF-denominated bonds
● Quote Convention/Inputs: Bid side prices
● Timing: 4:15pm London; 12pm on early close unless otherwise noted
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
Methodology
All bonds are priced daily by BVAL (except CHF-denominated bonds).
Other Pan-European Local Currency Indices
● Sources: BVAL: Croatian kuna, Czech koruna, Danish krone, Hungarian forint, Norwegian
krone, Polish zloty, Romanian Leu, Russian ruble, Swedish krona; SIX Swiss Exchange: Swiss
franc
● Quote Convention/Inputs: Bid side prices
● Timing:
○ 4:15pm London; 12pm on early close unless otherwise noted; 5pm CET for Swiss franc
● Frequency: Daily
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 86
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
Methodology
All bonds are priced daily by BVAL (except CHF-denominated bonds).
Asian-Pacific Indices
Bloomberg Asian-Pacific indices track multiple local currency debt markets, including Japanese
yen, Australian dollar, New Zealand dollar, Hong Kong dollar, Singapore dollar, Malaysian
ringgit, South Korean won, Thai baht, Indian rupee, and Chinese yuan. Except JPY corporates,
the indices are priced by BVAL, and returns for all are calculated by Bloomberg.
Japanese Government Bond Index
● Source: BVAL
● Quote Convention/Inputs: Mid side
119
● Timing: 3pm Tokyo
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
All securities in the Japanese
Government Bond Index are
priced daily by BVAL
Methodology
All securities are priced daily by BVAL. These prices serve as the foundation for curve
generation, as well as pricing and analytics for many other asset classes within the Bloomberg
Japanese Aggregate Index.
Other JPY-Denominated Corporate, Government-related and Securitized Indices
● Sources: Japan Securities Dealers Association (“JSDA”) for corporates, BVAL for all other
bonds
● Quote Convention/Inputs: Bid side prices
● Timing: 3pm Tokyo
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
Methodology
All securities are priced daily. The primary source of non-JGB JPY-denominated corporate
bonds is JSDA Reference Prices published by JSDA (Japan Securities Dealers Association).
However, since JSDA Reference Prices are mid prices, the indices use bid prices calculated
based on these. Other JPY-denominated bonds are priced by BVAL.
Other Asian-Pacific Aggregate Components
● Source: BVAL
● Quote Convention/Inputs: Bid side prices
119
Prior to December 2010, bid side was used.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 87
● Timing: (all local time below)
○ Australian dollar, New Zealand dollar: 5pm Sydney
○ Hong Kong dollar, Indonesian rupiah, Malaysian ringgit, Singapore dollar, South Korean
won, Thai baht: 5pm Tokyo
○ Chinese renminbi: Shanghai 5pm
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
Methodology
Bonds in the index are priced daily by BVAL.
EM Local Currency Government Index-Eligible Currencies
This section covers pricing conventions, sources, and methodologies for currencies within the
EM Local Currency Government and EM Local Currency Government Universal Indices.
● Source: BVAL
● Quote Convention/Inputs: Bid side dollar prices, new issues at offer (except Indian rupee,
which uses only bid)
● Timing:
○ Argentina, Brazil, Chile, Colombia, Mexico, Peru: 4pm New York
○ Croatia, Czech Republic, Egypt, Hungary, Israel, Nigeria, Poland, Romania, Russia, South
Africa, Turkey: 4:15pm London
○ China: 5pm Shanghai
○ Indonesia, Malaysia, Philippines, South Korea, Taiwan, Thailand: 5pm Tokyo
○ India: 12pm London
● Frequency: Daily
● Settlement: Next-day settlement for all dates except month-end, which is first calendar date
of following month
Methodology
All bonds are priced by BVAL on a daily basis. Certain emerging market bonds (e.g., Brazil,
Chile, South Korea and Israel) are traded dirty (with accrued interest) and may be quoted on a
nominal (or currency) basis. For index purposes, all prices are converted to clean (without
accrued interest) prices and quoted as a percentage of par.
Price Timing & Conventions for Nominal Bonds and Convertibles
Figure 1
G10 Currencies (Nominal Bonds): Price Timing & Conventions
Currency Name
Currency
Code
Sector Timing Bid/Mid
Australian dollar
AUD
All
5pm Sydney
Bid
British pound sterling
GBP
ABS, covered bonds
4:15pm London
Bid (new issues at ask)
British pound sterling
GBP Corporate FRN 4:15pm London Bid
British pound sterling
GBP
Gilts
4:15pm London
Mid
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 88
Currency Name
Currency
Code
Sector Timing Bid/Mid
British pound sterling
GBP
High grade corporates and government
related, emerging markets
4:15pm London
Bid (new corp issues at
ask)
British pound sterling
GBP High yield corporates 4:15pm London
Bid (new corp issues at
ask)
British pound sterling
GBP Treasury bills 4:15pm London Bid
Canadian dollar
CAD
All
4pm Toronto
Bid (new issues at ask)
Euro
EUR
Corporate FRN
4:15pm London
Bid
Euro EUR
High grade corporates, government-
related, emerging markets
4:15pm London
Bid (new corp issues at
ask)
Euro EUR High yield corporates 4:15pm London
Bid (new corp issues at
ask)
Euro
EUR
Treasuries
4:15pm London
Mid
Euro
EUR
Treasury bills
4:15pm London
Mid
Japanese yen JPY Government 3pm Tokyo Mid
Japanese yen
JPY
Non-government
3pm Tokyo
Bid
New Zealand dollar
NZD
All
5pm Sydney
Bid
Norwegian krone
NOK
All
4:15pm London
Bid (new issues at ask)
Swedish krona
SEK
All
4:15pm London
Bid (new issues at ask)
Swiss franc CHF All 5pm CET/4pm London Bid (new issues at ask)
United States dollar USD Treasuries 4pm New York
Bid (Series-L)/Mid
(Series-B)
United States dollar USD
Agencies, high grade corporates, MBS,
CMBS, ABS
4pm New York
Bid (new corp issues at
ask)
United States dollar
USD
High yield corporates, corporate FRN
4pm New York
Bid
United States dollar
USD
Municipals
4pm New York
Bid
Figure 2
Non-G10 Currencies (Nominal Bonds): Price Timing and Conventions
Currency Name Currency Code Sector Timing Bid/Mid
Argentine peso ARS Treasuries 4pm New York Bid (new issues at ask)
Brazilian real BRL Treasuries 4pm New York Bid (new issues at ask)
Chilean peso
CLP
Treasuries
4pm New York
Bid (new issues at ask)
Chinese yuan CNY
Treasuries
5pm Shanghai
Bid (new issues at ask)
Non-treasuries
Bid
Offshore renminbi CNH All 5pm Shanghai Bid
Colombian peso
COP
Treasuries
4pm New York
Bid (new issues at ask)
Croatian kuna
HRK
Treasuries
4:15pm London
Bid (new issues at ask)
Czech koruna
CZK
Treasuries
4:15pm London
Bid (new issues at ask)
Danish krone
DKK
All
4:15pm London
Bid (new issues at ask)
Egyptian pound EGP Treasuries 4:15pm London Bid (new issues at ask)
Hong Kong dollar
HKD
Treasuries
5pm Tokyo
Bid (new issues at ask)
Hungarian forint
HUF
Treasuries
4:15pm London
Bid (new issues at ask)
Indian rupee
INR
Treasuries
12pm London
Bid (new issues at ask)
Indonesian rupiah IDR Treasuries 5pm Tokyo Bid (new issues at ask)
Israeli shekel
ILS
Treasuries
4:15pm London
Bid (new issues at ask)
Korean won KRW
Treasuries
5pm Tokyo
Bid (new issues at ask)
Non-treasuries
Bid
Malaysian ringgit
MYR
Treasuries
5pm Tokyo
Bid (new issues at ask)
Mexican peso MXN Treasuries 4pm New York Bid (new issues at ask)
New Taiwan dollar
TWD
Treasuries
5pm Tokyo
Bid (new issues at ask)
New Turkish lira
TRY
Treasuries
4:15pm London
Bid (new issues at ask)
Nigerian naira
NGN
Treasuries
4:15pm London
Bid (new issues at ask)
Peruvian nuevo sol PEN Treasuries 4pm New York Bid (new issues at ask)
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 89
Currency Name Currency Code Sector Timing Bid/Mid
Philippine peso
PHP
Treasuries
5pm Tokyo
Bid (new issues at ask)
Polish zloty
PLN
Treasuries
4:15pm London
Bid (new issues at ask)
Romanian leu
RON
Treasuries
4:15pm London
Bid (new issues at ask)
Russian ruble RUB
Treasuries
4:15pm London
Bid (new issues at ask)
Non-treasuries
Bid
Singapore dollar
SGD
All
5pm Tokyo
Bid
South African rand ZAR
Treasuries
4:15pm London
Bid (new issues at ask)
Non-treasuries
Bid
Thai baht THB Treasuries 5pm Tokyo Bid (new issues at ask)
Figure 3
Convertible Bonds: Price Timing and Conventions
Currency Name Currency Code Timing Bid/Mid
British pound sterling
GBP
4:15pm London
Bid
Euro
EUR
4:15pm London
Bid
South African rand ZAR 4:15pm London Bid
Swedish krona
SEK
4:15pm London
Bid
Swiss franc
CHF
4:15pm London
Bid
UAE dirham
AED
4:15pm London
Bid
United States dollar
USD
4pm New York
Bid
All Bloomberg Convertible Indices are priced daily by BVAL.
Inflation-Linked Indices
Bloomberg government inflation-linked bond indices track multiple local currency inflation
markets (euro, pound sterling, Swedish krona, Danish krone, Polish zloty) and are priced by
BVAL.
Universal Government Inflation-Linked Bond Index (“UGILB”)
World Government Inflation-Linked Bond Index (“WGILB”)
EM Government Inflation-Linked Bond Index (“EMGILB”)
Global Inflation-Linked Bond Index (“Series-L”)
● Source: BVAL
● Quote Convention/Inputs: Mid side prices, and local market quote conventions
● Timing: Please refer to Figure 4
● Frequency: Daily
● Settlement:
○ UGILB, WGILB, EMGILB Indices: local market settlement conventions for all calculations.
○ Series-L: Next-day settlement for all dates except month-end, which is first calendar date
of following month
All inflation
-linked government
bonds are priced daily on the
mid side
Methodology
All securities are priced daily at the mid side and adhere to local market quote conventions. A
bond may have different inflated values/index ratios in Series-B and Series-L indices depending
on the settlement assumption used.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 90
Figure 4
Inflation-Linked Bond Indices: Timing
Currency Name
Currency
Code
Timing Bid/Mid
Universal
GILB
World
GILB
Global ILB
(Series-L)
EMGILB
Argentine peso
ARS
3pm New York
Mid
Australian dollar
AUD
5pm Sydney
Mid
Brazilian real BRL 3pm New York Mid
British pound sterling
GBP
4:15pm London
Mid
Canadian dollar
CAD
4pm New York
Mid
Chilean peso
CLP
3pm New York
Mid
Colombian peso
COP
3pm New York
Mid
Danish krone
DKK
4:15pm London
Mid
Euro
EUR
4:15pm London
Mid
Israeli shekel
ILS
4:15pm London
Mid
Japanese yen
JPY
3pm Tokyo
Mid
Korean won KRW 5pm Tokyo Mid
Mexican peso
MXN
3pm New York
Mid
New Zealand dollar
NZD
5pm Sydney
Mid
New Turkish lira
TRY
4:15pm London
Mid
Polish zloty PLN 4:15pm London Mid
South African rand ZAR 4:15pm London Mid
Swedish krona
SEK
4:15pm London
Mid
Thai baht
THB
5pm Tokyo
Mid
United States dollar
USD
4pm New York
Mid
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 91
Appendix 5: Bloomberg Fixed Income Classification System and Codes
Class 1 Class 2 Class 3 Class 4 Class Code
Treasury Treasury Treasury Treasury A
Government-
Related
Agencies
Government Guarantee Government Guarantee BAA
Government Owned No Guarantee Government Owned No Guarantee BAB
Government Sponsored Government Sponsored BAC
Local Authorities Local Authorities Local Authorities BB
Sovereign Sovereign Sovereign BC
Supranational Supranational Supranational BD
Corporate Industrial
Basic Industry
Chemicals CAAA
Metals & Mining CAAB
Paper CAAC
Capital Goods
Aerospace & Defense CABA
Building Materials CABB
Diversified Manufacturing CABC
Construction Machinery CABD
Packaging CABE
Environmental CABF
Consumer Cyclical
Automotive CACA
Leisure CACB
Gaming CACC
Home Construction CACD
Lodging CACE
Retailers CACF
Restaurants CACH
Consumer Cyclical Services CACI
Consumer Non-Cyclical
Consumer Products CADB
Healthcare CADD
Pharmaceuticals CADE
Supermarkets CADF
Tobacco CADG
Food & Beverage CADH
Energy
Independent CAEA
Integrated CAEB
Oil Field Services CAEC
Refining CAED
Midstream CAEE
Technology Technology CAF
Transportation
Airlines CAGA
Railroads CAGB
Transportation Services CAGC
Communications
Cable & Satellite CAHA
Media & Entertainment CAHB
Wirelines CAHC
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 92
Class 1 Class 2 Class 3 Class 4 Class Code
Wireless CAHD
Other Industrial Other Industrial CAZ
Utility
Electric Electric CBA
Natural Gas Natural Gas CBB
Other Utility Other Utility CBZ
Financial
Institutions
Banking Banking CCA
Brokerage, Asset Managers,
Exchanges
Brokerage, Asset Managers,
Exchanges
CCB
Finance Companies Finance Companies CCC
Insurance
Life CCDA
P&C CCDB
Health Insurance CCDE
REITS
Apartment CCEA
Healthcare CCEB
Office CCEC
Retail CCED
Other CCEZ
Other Financial Other Financial CCZ
Securitized
MBS Pass-Through
Agency Fixed-Rate
GNMA 30y DAAA
GNMA 15yr DAAB
Conventional 30y DAAC
Conventional 20y DAAD
Conventional 15y DAAE
ABS
Credit Card Credit Card DBA
Auto Auto DBB
Stranded Cost Utility Stranded Cost Utility DBE
Whole Business Whole Business DBF
Residential Mortgages Residential Mortgages DBG
Student Loans Student Loans DBH
ABS Other ABS Other DBZ
CMBS
Non-Agency CMBS Non-Agency CMBS DCA
Agency CMBS Agency CMBS DCB
Covered
Mortgage Collateralized
Pfandbriefe DDAA
Jumbo Pfandbriefe DDAB
Non-Pfandbriefe DDAC
Public Sector Collateralized
Pfandbriefe DDBA
Jumbo Pfandbriefe DDBB
Non-Pfandbriefe DDBC
Hybrid Collateralized Hybrid Collateralized DDCA
Other
Pfandbriefe DDZA
Non-Pfandbriefe DDZB
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 93
Appendix 6: Glossary of Terms – Index Terms
Accrued Interest
The amount of interest as a percentage of par that accrues between the last coupon date and
the current index settlement date owed to a buyer of the bond.
Alternative Weight Indices
Indices that use rules-based weighting schemes other than standard market value weights.
Examples are GDP Weighted, Fiscal Strength Weighted, and ESG Weighted Indices.
AUM
Assets Under Management.
Base Currency
The specified reporting currency of a published index. Returns for index-eligible securities in a
currency other than the base currency are converted into base currency returns on an
unhedged or a hedged basis.
BCIX
Function on Bloomberg to access Bloomberg Inflation-Linked and Series-B Indices.
Class 1-4
Four-pillar (Treasury, Government-Related, Corporate and Securitized) classification of
securities by issuer sector/industry in Bloomberg Indices launched in 2005 and backfilled
historically. There are up to four levels of granularity within each pillar.
Bellwether
Bellwether indices track on-the-run US Treasury issuance for the 3m, 6m, 2y, 3y, 5y, 10y, and
30y issues. Bellwethers can also refer to the specific instrument against which the spread of a
bond is quoted.
Breakeven Inflation
The spread that relates nominal and inflation-linked treasury bond prices. To calculate
breakeven inflation, the market convention takes the difference between the real yield on an
inflation-linked security and the nominal yield on a similar maturity nominal treasury.
Breakeven inflation is an approximation that allows for a relative value analysis, representing
the point of indifference between owning an inflation-linked and a nominal treasury bond.
Over the life of a bond, if the realized rate of inflation exceeds the breakeven rate, the
inflation-linked security will outperform the nominal security.
Canadian Model
Refers to the way in which many inflation-linked bonds trade. The notable characteristic of the
Canadian Model is that it allows all calculations to be done in real terms, with a conversion
factor to adjust into a nominal price on any given day.
Capital Security
Deeply subordinated fixed income securities that qualify for treatment as regulatory capital by
regulators or receive quasi-equity credit from ratings agencies.
Capped Index
Indices that cap exposure to a certain index attribute, such as issuer or country of risk, to a
fixed percentage.
Composite Index
Indices in which fixed weights are assigned to various sub-components (commonly defined as
currency, country, sector, maturity or credit quality sub-indices) to match a specified or
targeted portfolio allocation. Weights will rebalance back to the target weights at each
rebalancing.
Contingent Capital
Capital securities (sometimes referred to as “CoCos”) that convert into equity or are written
down based on explicit capital ratio/viability triggers. CoCos are not eligible for Bloomberg
Aggregate indices but are tracked in a standalone benchmark.
Country
Country of risk of an index-eligible security. The primary criteria for classifying country of risk
are where a bond’s guarantee originates if the issuer is backed by a government or parent
corporate entity; where the largest source of revenue, operations or cash flows is generated
from the issuer; and the location of an issuer’s headquarters or where its centralized decision-
making occurs. Additional criteria that may be used include the country of incorporation or
legal domicile; where an issuer’s stock is listed and traded; and where existing issuers within
the index that are similarly structured or organized are classified.
Coupon Return Returns derived from the interest payments accrued and/or received during the return period.
Covered Bond
Recourse debt instrument that is secured by a ring-fenced pool of assets on an issuer’s
balance sheet (commercial real estate, residential mortgages, public sector loans or other
assets). Within the indices’ global classification scheme, covered bonds are classified within a
sub-sector of Securitized.
CPI Type
The Consumer Price Index (“CPI”) series to which an inflation-linked bond is linked (e.g.,
French CPI ex tobacco, HICP).
Currency Return
Returns (hedged or unhedged) derived from converting local currency security returns to a
base reporting currency.
CUSIP
Security identification number for the US and Canada. A CUSIP consists of eight alphanumeric
characters. The first six identify the issuer; the following two identify the issue. A ninth (check
digit) is left off identifiers in Bloomberg Indices.
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Bloomberg Fixed Income Index Methodology 94
Dated Date
The date on which interest begins to accrue on a fixed income bond. Investors who purchase a
bond between interest payment dates must pay the seller or issuer any interest that has
accrued from the dated date to the purchase date or settlement date.
Day Count Convention
The calendar conventions used to calculate accrued interest and other cash flow-based
analytics for a given bond as of a given settlement date. Represented as (number of days per
month)/(number of days per year), day count convention may vary from security type and local
market. Examples include 30/360, ACT/360, ACT/ACT, etc.
Defaulted Bond
For index purposes, a security is considered to be in default if it has missed a scheduled
interest payment, has an index rating of “D” based on the indices’ credit quality methodology
or is trading flat. Defaulted securities are not eligible for corporate hi
gh yield indices; however,
defaulted emerging markets sovereigns remain index eligible.
Discount Margin Incremental spread earned above a specific reference rate for a floating-rate bond.
Dividends Received Deductible
(DRD)
An equity-like security for which interest payments are partially subject to income tax for the
end investor. These types of securities are excluded from Bloomberg Indices.
Duration Extension
This quantifies the instant index duration change that occurs when the index membership is
reset each month-end. It accounts for monthly index turnover, but also factors in the outflow of
accumulated cash as the index is reset. It is calculated as the difference between the OAD of
the Returns Universe and Projected Universe at month-end.
Duration-Hedged Index (DHI)
An index whose return reflects that on the underlying cash index, with its OAD exposure
hedged (fully or partially) using its Mirror Future Index (MFI).
Emerging Market
Bloomberg uses a fixed list of countries defined as emerging markets countries for index
inclusion purposes that is based on World Bank Income group definitions (Low/Middle), IMF
country classifications (Non-Advanced Economies), and other advanced economies that may
be less accessible or investable for global debt investors.
Enhanced Equipment Trust
Certificates (EETC)
A type of pass-through security commonly used in aircraft finance in the US. In the transaction,
a trust certificate is sold to investors to finance the purchase of an aircraft by a trust, which then
leases it to the airline and the trustee passes payment through the trust to the investors. EETC
bonds are eligible for Bloomberg Indices and are classified as corporates within the global
classification scheme.
ESG
Environmental, Social and Governance (ESG) is an investment theme/set of criteria used to
evaluate non-financial risks to which an investment is exposed in an investment portfolio. An
established investment theme in equities, ESG is emerging as a more prominent consideration
in fixed income and can be evaluated using Bloomberg MSCI ESG Fixed Income Indices.
Eurodollar/Euroyen
US dollar-denominated bond issued outside the US/Japanese yen-denominated securities
issued outside of Japan.
Excess Return
Measure of performance of a spread security over that of an equivalent treasury security. For
municipal bonds, excess return is calculated over the non-zero, non-callable Aaa GO duration-
neutral curve.
Exchange Traded Fund (“ETF”)
A registered and e
xchange listed investment fund that is generally designed to track a bond or
equity benchmark index passively, though active ETFs do exist. Bloomberg fixed income
benchmark indices are licensed by a number of ETF providers.
Expected Rating
When the credit rating assigned by a rating agency is referred to as “expected,” it generally
indicates that a full rating has been assigned based on the agency’s expectations of receiving
final documentation from the issuer. Once the final documentation is received and reflects the
agency’s expectations, the expected rating is converted to a final rating. Expected ratings may
be used for index classification purposes to ensure bonds are added to indices in a timely
manner or to classify split-rated issuers properly.
Ex-Dividend Date
The first date on which the holder of a bond is not entitled to receive the next interest
payment. Index users will see the accrued interest of a bond show as negative once it starts
trading ex-dividend, and the expected coupon payment is discounted back to the current
index settlement date.
Fiscal Strength Weighted
Alternative weighting methodology for Bloomberg Indices that tilts the natural market value
weight of bonds based on measures of sovereign and institutional strength, such as debt as a
percentage of GDP, deficit as a percentage of GDP, and current account balance as a
percentage of GDP.
Flash Index Report
Daily report published at about 4:30pm (New York time) that estimates preliminary index
returns for select US indices based on initial pricing. Final index returns may differ from early
estimates based on additional pricing verification and corrections.
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Bloomberg Fixed Income Index Methodology 95
Float Adjusted
Within Bloomberg Indices, adjustments made to the par amount outstanding of bonds for
holdings of central governments that are publicly available. US nominal and inflation-linked
Treasuries held by the US government in SOMA accounts are adjusted in flagship Bloomberg
Series-L indices. Other SOMA holdings, as well as Bank of England and Bank of Japan
holdings are not adjusted in flagship indices, and are instead reflected in Float Adjusted
Indices.
Floating-Rate Note (“FRN”)
Bonds that accrue interest based on a specified spread over a reference rate that resets
periodically. Floating rate corporate, ABS and treasury indices are available within the index
platform.
Forward Value
In the indices’ currency hedging methodology, the number of base-currency units to be
received for each unit of the local currency delivered in the forward contract. This value is set
in the market place at the beginning of the month and is received at delivery at the end of the
month.
FX Spot/Forward Rate
FX spot and 1-month forward exchange rates sourced from Refinitiv at 4pm London time for
purposes of currency return and market value calculations in Bloomberg Indices.
GDP Weighted
Alternative weighting methodology for Bloomberg Indices that weights bonds based on the
gross domestic product (“GDP”) of a bond’s country of risk.
Global Risk Model
Multi-factor risk model available through the POINT® and Bloomberg platforms that quantifies
risks exposures of portfolio instruments by identifying common sources of risk along different
dimensions (systematic risk factors). For fixed-income instruments, systematic risk factors are
typically divided into two sets: those that influence securities across asset classes (e.g., yield
curve risk) and those specific to a particular asset class (e.g., prepayment risk in securitized
products).
Government Guaranteed Agency
Classification within the Bloomberg Indices’ scheme that includes issues that carry direct
guarantees of timely payment of interest and principal from central governments or from
government agencies that have direct guarantees from central government. Government
ownership is not a factor, although most entities will be government owned.
Government Owned No
Guarantee Agency
Classification within the Bloomberg Indices’ scheme that includes issuers that are 50% or more
owned by central governments but issue debt that carries no guarantee of timely repayment.
This includes direct ownership by governments, as well as indirect ownership through other
government owned entities. This sector also includes state-owned entities that operate under
special public sector laws.
Government Sponsored Agency
Classification within the Bloomberg Indices’ scheme that includes issuers that are less than
50% central government owned and that have no guarantee, but that carry out government
policies and benefit from closeness to the central government.
Hedge Market Value
The par amount that a one-month currency forward is put on for in the index currency hedging
rules.
Hybrid Performance Attribution
(HPA) Model
Multi-currency attribution model with daily outperformance calculation and compounding
available through the POINT® and Bloomberg platforms. The HPA model covers the majority
of asset classes, including fixed income and equity cash instruments; interest rate, currency,
credit and equity derivatives; and ETFs and funds of funds.
Identifier
Preferred identifier for a security that can be CUSIP, ISIN, deal acronym or index-assigned
identifier for bonds without a CUSIP.
Inception Date
Historical start date of a published Bloomberg index return series. For a given index, this can
vary depending on the base currency in which returns are run. When a new index is created,
index returns are available only on a monthly basis historically through its inception date and
then on a daily basis.
Index Advisory Council (IAC)
The council through which Bloomberg consults Stakeholders (typically annually) on such
themes as benchmark construction and potential changes to broad market benchmarks.
Index Flag
An index data field that combines all of the underlying rules of a flagship index into a single
field to identify whether a bond meets the eligibility criteria of a particular index.
An index flag value of BOTH_IND indicates a bond is eligible for both the Returns and
Projected Universes.
An index flag value of BACKWARD indicates a bond is included in the Returns Universe only.
An index flag value of FORWARD indicates a bond is included in the Projected Universe only.
An index flag value of NOT_IND indicates a bond is not included in an index.
Index ID
Unique numeric identifier for each published Bloomberg benchmark index. Each index may
be available in a number of different base reporting currencies on a hedged or an unhedged
basis, but each return series will share the same Index ID.
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Bloomberg Fixed Income Index Methodology 96
Index Name
All indices published by Bloomberg are identified by a unique index numerical ID and have a
short and a long name associated with that ID. For guidance on official naming conventions,
please see the associated chapter in the index handbook.
Index Pricing Service
Fee-based service requiring proper licensing that provides bond-level prices via FTP for the
US Aggregate, US TIPS and US STRIPS Indices between 4:30 and 5pm (New York time). Index
returns are not calculated as part of this service.
Index Rating
Index Rating is a derived value that is used to classify bonds by credit quality in Bloomberg
Indices. It is set as the middle rating of Moody’s, Fitch and S&P; when a rating from only two
agencies is available, the lower is used; if only one agency rates a bond, that rating is taken.
Index Ratio
Generally, the ratio of domestic CPI (as of the index settlement date) to the base reference CPI
of an inflation-
linked security that is used to adjust the nominal principal and coupon payments
so that their real value remains unchanged. Because each security has its own unique base CPI
depending on when it was issued, the index ratio differs for each bond. Different market
conventions exist for index ratio calculations.
Index Turnover
An estimate of gross index compositional shift measured by the market value of securities
entering a
nd exiting an index (as a percentage of the index’s beginning market value). Users of
POINT® and Bloomberg can run an index turnover report for Bloomberg benchmark indices.
The report provides turnover estimates for a specified time, as well as changes in par amount
outstanding for an index. If an index turnover report is run over a period longer than one
month, the report will compare changes only from the beginning and ending universes.
Index Level
Calculated as the Since Inception Total Return plus 100. This is essentially the Since Inception
Total Return value indexed to 100 (instead of zero) to calculate cumulative returns between any
two points in time.
Inflation-Linked/Treasury Inflation
Protected Securities (“TIPS”)
Inflation-linked securities whose principal is adjusted for inflation to guarantee investors a real
rate of return regardless of the inflationary environment. These securities provide purchasing
power for the buyer and set a real cost of finance for the issuer. In the US, these securities are
called TIPS.
Intermediate
Within the context of Bloomberg index construction, Intermediate sub-indices include
securities with at least 1 year and up to, but not including, 10 years to final maturity.
ISIN
An alphanumeric 12-character identifier assigned by the local national numbering agency. An
ISIN consists of a two-letter country code followed by the nine-
character alphanumeric national
security identifier and a check digit.
LEHM
Bloomberg page that allows users to access index returns and statistics, grouped by regional
and sector categories, as well as historical data for Bloomberg benchmark indices that have
been tickerized. Bloomberg terminals must be permissioned for the LEHM functionality by the
index team.
Liability Driven Investing (“LDI”)
Investment strategy designed to match a specific investor’s liability stream or future cash flow
obligation. LDI Index Series are a standard benchmark LDI index offering for US investors.
Bloomberg also offers customized LDI benchmark indices that use strips or swaps in addition
to cash bonds.
Loan Participation Note (“LPN”)
Fixed income instrument that permits investors to buy portions of an outstanding loan or
package of loans. LPNs are a common form of issuance for Russian corporate and
government-related entities due to tax considerations. Similar structures have also been used
by other emerging European issuers.
Long
Within the context of Bloomberg index construction, “Long” sub-indices include securities with
at least 10 years to final maturity.
MBS Generic
Within Bloomberg Indices, US agency pass-through mortgage pools are grouped into pool
aggregates or “generics” based on program, origination year and coupon for purposes of
index construction.
MBS Pass-Through
A fixed income structure that pools mortgage loans with similar characteristics into a mortgage
backed security. Principal and interest payments of underlying loans are allocated to security
holders on a pro rata basis. MBS pass-throughs issued by the US agencies (Fannie Mae,
Freddie Mac and Ginnie Mae) are eligible for the US Aggregate and Global Aggregate
Indices. Private-label or non-government issued MBS pass-throughs are not index eligible.
Medium Term Note (“MTN”)
A debt instrument that is offered continuously to investors by an agent of the issuer based on a
shelf registration.
Mirror Future Index (“MFI”)
An MFI is a funded index whose return reflects that on a funded set of treasury futures
contracts, weighted so as to match closely the beginning-of-the-month OAD of an underlying
standard bond index.
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Bloomberg Fixed Income Index Methodology 97
Mirror Swap Indices
Indices that provide excess returns of Bloomberg sector indices with respect to swaps. The
purpose of mirror indices is to track the performance of high grade indices (e.g., aggregate,
government/credit, credit, agencies, MBS) relative to swaps on a KRD-matched basis.
Municipal Bond
Bonds issued by US local authorities that can be either tax-exempt or taxable to end investors.
Tax-exempt municipals are tracked in a separate and broad benchmark index family, while
taxable municipals qualify for the Bloomberg US Aggregate Index.
Non-Deliverable Forward (“NDF”)
A forward or futures contract where counterparties settle differences between the contracted
price and the spot rate at settlement, rather than taking actual delivery. A number of
currencies in Bloomberg Indices trade as NDF in the forward markets.
Paydown Return
Returns related to scheduled and unscheduled payments of principal.
Payment-in-Kind (“PIK”)
A type of bond that pays interest in the form of additional bonds. PIK bonds are eligible for
Bloomberg US High Yield Indices.
Pfandbriefe
A type of regulated covered bond security issued by German banks that can be collateralized
by assets such as mortgage loans and public sector loans. Distinctions between Pfandbriefe
and non-Pfandbriefe securities are made at the Class 4 level within the covered bond sector in
Bloomberg Indices.
Placement Type
Indicates whether a bond is publicly registered, exempt from registration or privately placed.
Can also identify a bond as being marketed and sold to local investors only, non-local
investors or globally offered in multiple markets.
Prepayment Penalty Return
(“CMBS”)
The return due to additional penalty premiums paid in connection with certain prepayments.
The premiums are generally distributed as excess interest on the certificates.
Price Return
Capital appreciation/depreciation derived from underlying security bond price changes.
Public Securities Association
(“PSA”) Settlement
Refers to the forward settlement conventions of the US agency MBS market. In 2006, the PSA
merged with the Securities Industries Association and became the Securities Industry Financial
Association (“SIFMA”); however, the term “PSA Settlement” is still used within Bloomberg US
MBS Index pricing and methodology.
QDI-Eligible
Qualified Dividend Income (“QDI”) securities that under various tax laws are more equity-like
than traditional fixed income securities. These types of securities are not eligible for
Bloomberg Indices.
Replicating Bond Index (“RBI”)
RBI baskets are portfolios of derivative instruments designed to track a bon
d index. The basket
is reconstituted each month, using a mechanistic algorithm to match, as closely as possible,
the term structure and spread exposures of a given Bloomberg index.
Returns (Backwards) Universe/
Projected (Forward) Universe
For each index, Bloomberg maintains two universes of securities: the Returns (Backward) and
Projected (Forward) Universes. The composition of the Returns Universe is rebalanced at each
month-end and represents the fixed set of bonds on which official index returns are calculated
for the next month. The Projected Universe is a forward-looking projection that changes daily
to reflect issues dropping out of and entering the index, but is not used for return calculations.
The composition of the Projected Universe on the last day of the month (the rebalancing date)
becomes the Returns Universe for the following month.
Sector Code
Non-hierarchical issuer classification scheme used for high level sector classifications. This
scheme predates the more granular, nested classification scheme that is currently in use, and
forms the basis of a number of historical index definitions.
Series-B/Series-L Indices
For overlapping index families, refers to legacy Lehman Brothers (Series-L) indices, such as the
Global Inflation-Linked Index, and legacy Capital (Series-B) indices, such as the World
Government Inflation-Linked (“WGILB”) Index, after the two index families were merged under
a single “ Indices” name in October 2008. While index eligibility is largely the same, index
conventions and mechanics, such as settlement date, may differ.
Settlement Date
For index purposes, the date used for pricing, accrued interest, return, and analytics
calculations. For all Series-L indices, settlement date is assumed as T+1 calendar day, except
for MBS, which assume same-day settle. At month-end, index settlement is assumed to be the
first calendar day of the following month. For Series-B indices, index settlement assumes local
market conventions and can vary from market to market, based on conventions and holiday
calendars. For portfolio management purposes, settlement date is the date on which an
executed security transaction must be completed and the buyer must pay for the securities
delivered by the seller.
Sharpe Ratio
An asset’s excess return over a risk-free asset divided by its volatility, measured by the
standard deviation of its returns.
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Since Inception Total Return
Cumulative total return of an index since its inception date. Can be calculated in a number of
reporting currencies and on a hedged or an unhedged basis.
Sinking-Fund Bond
A bond where interest payments are paid out of an issuer’s sinking fund, a pool of money set
aside to repurchase a portion of the bonds it has issued each year. The issuer has an option to
repurchase bonds either at the sinking fund price or the current market price.
Sovereign Rating
A credit quality classification field that represents the foreign currency long-term debt rating of
a bonds’ country of risk using the middle of Moody’s, S&P and Fitch ratings.
Stakeholder
Subscribers and other persons or entities who own contracts or financial instruments that
reference a benchmark or otherwise use the Indices.
Step-Up Bond
A bond that pays an initial coupon rate for a specified time, followed by a higher coupon rate
in subsequent periods.
Strategy Index
An index constructed to track the performance of a systematically defined, tradable index
strategy.
Structured Note
Fixed income instrument with an embedded derivative component. These are not index
eligible.
Submission
Prices, estimates, values, rates or other information that is provided by a Submitter to
Bloomberg for the purposes of determining a benchmark. This excludes data soured from
regulated markets or exchanges with mandatory post-trade transparency requirements.
Subscriber
A person or entity that purchases benchmark determination services from Bloomberg.
Sukuk Bond
Securities structured to comply with Islamic law and investment principles, which prohibit
charging or paying interest.
Supranational
An international organization or union, whereby member states transcend national boundaries
or interests to share in the decision-making and vote on issues pertaining to the wider group.
Supranational is a sub-sector of Government-Related in the indices’ classification scheme.
Systematic Strategy
Common investment strategies include fundamental, enhanced carry, trend following, relative
value, momentum and macro thematic.
Target Maturity Index
Indices where eligibility is defined by a range of target maturity dates, rather than time to
maturity.
TBA
To-Be-Announced contract. An agreement between two counterparties to buy and sell agency
mortgage pools in the future.
Third-Party Index/Source
Refers to non-Bloomberg indices or data attributes/analytics sourced from outside the
Bloomberg index database.
Ticker
Broad issuer-level identifier used in Bloomberg Indices. Ticker is used for issuer constrained
indices, VLI indices and rules-based issuer-level index definitions. Ticker may also refer to a
unique identifier of an index on Bloomberg.
Toggle Note
A type of a PIK bond that has an embedded option that allows the issuer to pay coupon in
cash or in additional securities.
Total Return Swap (“TRS”)
TRS are over-the-counter derivative agreements whereby an exchange of payments is made
that is linked to or references a published index.
Trade to Flag
Indicates whether a security is trading to a call date, put date, maturity date or is in default.
US Rule 144A
Securities issued under US Rule 144A do not have to file a public registration statement with
the SEC, but can be sold only to qualified institutional buyers (“QIBs”). Issuers of US Rule 144A
bonds may or may not have the right to register the bonds with the SEC in the future. To be
included in the US Aggregate Index, issuers must have the option to register the bond at a
later date.
Very Liquid Index (“VLI”)
A narrower subset of an existing Bloomberg broad-based flagship index (such as the US High
Yield Index) that follows the eligibility criteria as the index on which it is based, but only
includes more recently issued bonds with a higher minimum par amount outstanding and
restricts inclusion by issuer to only the largest issue or issues.
Write-down Return (“CMBS”)
The return related to the reduction in the outstanding class balance due to loss of principal.
The principal loss is valued at the ending price of the bond.
Yankee
A USD-denominated bond issued by a non-US entity in the US market. Within Bloomberg
Indices, Yankees were recognized as a separate sector until July 2000, when all Yankee
corporates were absorbed into their respective industry and sector classifications.
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Bloomberg Fixed Income Index Methodology 99
Appendix 7: Glossary of Terms – Index Analytics
Ask Spread
Calculated as the Spread to Benchmark (see below for definition) minus 10bp.
Average Life
The par-weighted average time (in years) to the principal repayment for non-callable securities
and the par-weighted average time (in years) to the probable call/put for callable securities.
Blended Spread
Analytic specific to EM bonds. Measures the riskiness of Brady bonds, which were issued in the
1980s by struggling sovereign countries and partially collateralized by the US Treasury,
excluding said collateralization.
Convexity (“OAC”)
Convexity is the second derivative of the price-yield function and measures the second-order
change in the price of a bond with respect to yield changes. OAC is positive for conventional
bonds and is generally negative for mortgage pass-
throughs. Negative convexity dampens the
price appreciation if interest rates fall and aggravates the price decline if interest rates rise.
Constant Prepayment Rate (“CPR”)
For ABS, MBS and CMBS bonds, CPR measures prepayments as a percentage of the current
outstanding balance. CPR can be realized or projected; realized CPR is used in MBS
prepayment return calculations, while projected CPR for MBS is generated by the mortgage
prepayment model and serves as the basis for index analytics such as duration. It is expressed
as an annual rate (e.g., a CPR of 10 indicates that 10% of a pool’s current loan balance is
projected to prepay over the next year).
Current Yield
Defined as the ratio of the annual income (interest or dividends) received by the bond divided
by the current price of the security.
Duration Times Spread (“DTS”)
Duration Times Spread is usually calculated as L-OAS * OASD. This measure is popular for
spread/credit risk analysis, as the volatility of the spread return of a security is typically
proportional to its DTS. DTS factors are used for a number of asset classes in the Hybrid
Performance Attribution Model and Global Risk Model.
DV01
The dollar duration or DV01 is defined as the derivative of the security with respect to its yield.
It can also be seen as the product of modified duration and the price of the financial
instrument.
ISMA Duration
International Securities Market Association (ISMA, formerly AIBD) duration is used in place of
OAD for non-US securities. The major difference between these two measures is the
assumption of an annual coupon instead of a semi-annual coupon in ISMA yield calculations.
ISMA Yield
Represents a standard yield to maturity calculation recommended by ISMA. The ISMA yield is
compounded annually regardless of the coupon frequency.
Key Rate Duration (“KRD”)
A measure of the sensitivity of a security to a specified maturity range on the constant maturity
par yield curve. The KRD maturities used are the 6m, 2y, 5y, (7y for JPY), 10y, 20y and 30y. The
sum of the KRDs will not necessarily equal the OAD; the parallel shift OAD makes the
assumption that all points on the yield curve are perfectly correlated (e.g., they move in
parallel), where KRD calculations assume a linear correlation for nearly all maturities. The shift
size is 25bp for corporate bonds and 5bp for government and securitized issues.
Libor Option Adjusted Duration
(“L-OAD”)
A measure of a security’s sensitivity to interest rates. Bloomberg uses a lognormal option
model and the current price of the bond to calculate the Libor-option adjusted spread (“L-
OAS”) of the bond. Keeping L-OAS constant, L-OAD is calculated by shocking the par swap
curve (as opposed to the par treasury curve for OAD) up and down by a fixed amount and
measuring the resulting change in price. The shift size for computing L-OAD is 25bp for non-
government securities and 10bp for government securities. For swaps, the size of the shift is
1bp.
Libor Option Adjusted Spread (“L-
OAS”)
L-OAS is the constant spread that when added to all discount rates from the swap curve on the
binomial interest rate tree model (used by the indices) will make the theoretical value of the
cash flows equal to the market price of the instrument.
Macaulay Duration
A measure of the weighted average time to maturity (in years) for an investor to receive the
present value cash flows from a bond.
Maturity
The time (in years) for which an instrument remains outstanding. The term refers to a finite
period at the end of which the instrument will no longer exist and the principal is repaid with
interest.
Modified Duration A measure of the effect that a 100bp change in interest rates will have on the price of a bond.
Mortgage Rate Duration
A measure of the price sensitivity to changes in the mortgage rate used in the term structure
model. It can be thought of as the delta of the embedded prepayment option in an MBS
where the option strike is the current mortgage rate.
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Bloomberg Fixed Income Index Methodology 100
Muni Duration
The duration of a tax-exempt municipal bond. It is calculated using the non-zero, non-callable
AAA General Obligation (GO) Municipals curve, instead of a standard treasury-based yield
curve.
Muni Yield
The yield for tax-exempt municipal bonds. It is yield to call if a bond is priced above its call
price and yield to maturity when it is priced below the call price.
Nominal Duration
Calculated for inflation-linked securities as a beta-adjusted duration. Also referred to as
Empirical Duration. Calculated for Series-L US TIPS only. The beta used is a 60-day trailing
beta.
Nominal Yield
Represents the coupon rate on a bond. The nominal yield is the interest rate (to par value) that
the bond issuer promises to pay the bond holders.
Option Adjusted Duration (“OAD”)
A measure of a security’s sensitivity to interest rates.
The indices use a lognormal option model
and the current price of the bond to calculate the option adjusted spread (“OAS”) of the bond.
Then keeping this OAS constant, OAD is calculated by shocking the par yield curve (as
opposed to the zero or forward curves) up and down by a fixed amount and measuring the
resulting change in price. The shift size for computing OAD is 25bp for non-government
securities and 10bp for government securities. For swaps, the size of the shift is 1bp.
Option Adjusted Spread (“OAS”)
The constant spread that when added to all discount rates from the treasury curve on the
binomial interest rate tree model (used by the indices) will make the theoretical value of the
future cash flows equal to the market price of the instrument.
Option Adjusted Spread Duration
(“OASD”)
A measure of a security’s price sensitivity to changes in the OAS. The shift size for computing
the OASD is 25bp for non-government securities, 10bp for government securities and 1bp for
interest rate derivatives.
Par Curve
Graph of the yields of hypothetical treasury bonds trading at par. On the par curve, the yield to
maturity of a security is equal to its coupon. The par curve can be derived from the spot curve.
Projected OAD
Index-level OAD based on the Projected Universe of an index. Each bond contributes based
on its current market value.
Real Duration
Calculated for inflation-linked bonds as the sensitivity in real prices to changes in real yield.
Real duration calculations mirror standard calculations for nominal duration, but use real
instead of nominal yields.
Returns OAD
Index-level OAD based on the Returns Universe of an index. Each bond contributes based on
RU Security Market Value/RU Total Market Value, which effectively scales returns OAD
downward for cash.
Real Yield
Represents an interest rate that has been adjusted to remove the effects of inflation. It reflects
the real cost of funds to the borrower and the real yield to the lender. The real interest rate is
calculated as the difference between the nominal rate and inflation projections.
Spline Curve
The treasury spot curve generated by a spline process. These treasury curves are constructed
via the Vasicek-Fong cubic exponential spline, which is a fitted parametric discount function
that prices government zero coupon bonds at any maturity and models the discount factors as
a weighted sum of exponential functions. The spline depends on parameters determined by
minimizing the quadratic error of the market price of a given set of coupon bonds and sums
their discounted cash flows.
Spot Curve
A representation of the term structure of interest rates in the government bond markets. These
swap curves are constructed via a bootstrap methodology. The spot curve can be used as a
starting point to price any fixed income security and to derive the par or forward curves.
Spread to Benchmark
The quoted spread of a bond that is relative to the security off which it is priced, typically an
on-the-run treasury (the 2y US Treasury bellwether, the 5y US Treasury bellwether, etc.). For
MBS, this represents a calculated value, which is derived as the yield of the MBS generic minus
the yield of the US Treasury bellwether with the closest average life to the MBS generic.
Vega
A measure of a security’s sensitivity to implied volatility. The indices use a lognormal option
model and the current price of the bond to compute option-adjusted analytics. The vega is
computed by bumping the implied volatility in the stochastic interest rate model by 1% while
keeping everything else constant.
Yield to Maturity
Represents the rate of return anticipated on a bond if held until its maturity. The YTM
calculation takes into account the bond’s current market price, par value, coupon interest rate
and time to maturity under the assumptions that all cash flows received are reinvested at the
same rate as the bond’s current yield.
Yield to Worst
Represents the lowest potential yield that an investor would receive on a bond if the issuer
does not default. The yield to worst is calculated by making worst-case scenario assumptions
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Bloomberg Fixed Income Index Methodology 101
on the issue by calculating the returns that would be received if provisions, including
prepayment, call or sinking fund, are used by the issuer. The YTW is used to evaluate the
worst-case scenario for yield to help investors manage their risk and exposures.
ZV Spread
The zero-volatility spread represents the spread that the investor would realize over the entire
treasury spot rate if the bond is held to maturity. It is the spread that makes the present value
of the cash flows from corporate bond when discounted at the treasury spot rate plus the
spread equal to the corporate bond’s price.
Appendix 8: Glossary of Terms – Index Aggregation Values
Amount Outstanding
Par amount outstanding of a bond expressed in the index base reporting currency. Amount
Outstanding for an index-eligible security is adjusted for full or partial calls, sink events and
agency MBS prepayments. Float adjustments are also made to Amount Outstanding values in
Bloomberg flagship indices for nominal and inflation-linked US Treasuries. It reflects the
current amount outstanding of a bond in the Projected Universe; changes to amount
outstanding are reflected in a bond’s contribution to index-
level returns in the month following
the adjustment.
Amount Outstanding BOM
This reflects the par amount outstanding of a bond at the beginning of the month and is held
constant during the month within a given index. This is the outstanding value that determines a
bond’s contribution to index-level returns, along with beginning of the month price and
accrued interest.
Amount Outstanding (Global
Aggregate)
For each index-eligible security, Amount Outstanding (Global Aggregate) is calculated as a
scaled unit that is used to determine Global Aggregate Index eligibility. The fixed minimum
issue size for each local currency bond market is set to 300mn Amount Outstanding (Global
Aggregate) units, establishing the ratio for calculation of this value for all bonds denominated
in a given local currency. For example, a JPY-denominated bond with 35bn par amount
outstanding, which is equal to the Global Aggre
gate minimum for JPY, would show an Amount
Outstanding (Global Aggregate) value of 300mn, while a JPY-denominated bond with a 70bn
par amount outstanding would show an Amount Outstanding (Global Aggregate) value of
600mn.
Amount Outstanding (Native)
Par amount outstanding of a bond expressed in the currency denomination of the bond.
Amount Outstanding (Native) can be equal to the Amount Outstanding depending on
whether the bond is denominated in the index base reporting currency. For example, a GBP-
denominated bond would have Amount Outstanding expressed in EUR to reflect the base
reporting currency of the Pan-European Aggregate Index, but Amount Outstanding (Native)
would be expressed in GBP. A EUR-
denominated bond would have both Amount Outstanding
and Amount Outstanding (Native) expressed in EUR.
Capped Market Value
An instrument’s market value adjusted to reflect bond-level weights within a constrained,
composite or other alternative weight index. Within a given alternative weight index, the value
that is displayed in the “Market Value” field will reflect the specific weighting scheme of the
benchmark. “Capped Market Value” is not an explicit attribute that is available to index users.
Market Value
This reflects the current price, accrued interest and amount outstanding of a bond and is used
in the aggregation of index-level statistics such as duration and yield. It is calculated as
[(Ending Price + Accrued Interest) * Amount Outstanding]/100. Index users looking at the
Market Value field within the co
ntext of index that is constructed using an alternative weighting
scheme will see a value that reflects the specified capping, composite weights, etc.
Market Value BOM
This reflects the market value of a bond at the beginning of the month and is held constant
during the month for index purposes. This is the value that determines a bond’s contribution
to index-level returns and is a function of the beginning of the month amount outstanding,
price and accrued interest.
RU Cash Market Value
Defined as RU Market Value - RU Security Market Value. RU Cash Market Value is used in the
calculation of returns OAD, which is scaled downward for cash held in the index.
RU Market Value
Calculated as [(Price BOM + Accrued BOM) * Outstanding BOM] * (1+ Total Return). RU Market
Value is used in the calculation of returns OAD, which is scaled downward for cash held in the
index.
RU Security Amount Outstanding
For MBS and CMBS, calculated as the beginning of the month Amount Outstanding minus any
Principal Payments. For bonds that have been reopened, calculated as the beginning of the
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Bloomberg Fixed Income Index Methodology 102
month Amount Outstanding. For all other securities, calculated as the ending Amount
Outstanding value. Used as an input for RU Security Market Value.
RU Security Market Value
Calculated as [(Ending Price + Ending Accrued) * RU Security Amount Outstanding]. RU
Security Market Value is the numerator in the weighting of each bond’s contribution to index-
level OAD calculated on the Returns Universe.
Appendix 9: Index Governance and Index Methodology Considerations
Benchmark Governance, Audit and Review Structure
BISL uses two primary committees to provide overall governance and effective oversight of its
benchmark administration activities:
● The Product, Risk & Operations Committee (“PROC”) provides direct governance and is
responsible for the first line of controls over the creation, design, production and
dissemination of benchmark indices, strategy indices and fixings administered by BISL,
including the Indices. The PROC is composed of Bloomberg personnel with significant
experience or relevant expertise in relation to financial benchmarks. Meetings are attended
by Bloomberg Legal & Compliance personnel. Nominations and removals are subject to
review by the BOC, discussed below.
● The oversight function is provided by Bloomberg’s Benchmark Oversight Committee
(“BOC”). The BOC is independent of the PROC and is responsible for reviewing and
challenging the activities carried out by the PROC. In carrying out its oversight duties, the
BOC receives reports of management information both from the PROC as well as Bloomb
erg
Legal & Compliance members engaged in second level controls.
On a quarterly basis, the PROC reports to the BOC on governance matters, including but not
limited to client complaints, the launch of new benchmarks, operational incidents (including
errors & restatements), major announcements and material changes concerning the
benchmarks, the results of any reviews of the benchmarks (internal or external) and material
stakeholder engagements.
Internal and External Reviews
BISL’s index administration is also subject to Bloomberg’s Compliance function which
periodically reviews various aspects of its businesses in order to determine whether it is
adhering to applicable policies and procedures, and assess whether applicable controls are
functioning properly. In addition, Bloomberg may from time to time appoint an independent
external auditor with appropriate experience and capability to review adherence to benchmark
regulation. The frequency of such external reviews will depend on the size and complexity of t
he
operations and the breadth and depth of the Index use by stakeholders.
Index Advisory Council (IAC)
IACs are composed of key market participants and other influential individuals to assist BISL in
setting index priorities, to discuss potential rules changes and to provide ideas for new
products. IACs are generally constituted on an annual basis. While potential benchmark
changes are discussed through this process, all feedback received is non-binding and all final
decisions on benchmark index rules are made by the PROC (subject to BOC review) after the
review period has ended.
Data Providers and Data Extrapolation
Bloomberg indices are rules-based, and their construction is designed to consistently produce
index levels without the exercise of discretion. Except as otherwise described in this
methodology document, the indices are produced without the interpolation or extrapolation of
input data.
In addition, BISL seeks to avoid contributions of input data that may be subject to the discretion
of the source of such data and instead seeks to use input data that is readily available and/or
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Bloomberg Fixed Income Index Methodology 103
distributed for a number of non-index or benchmark-creation purposes. Accordingly, the indices
require no ‘contributors’ to produce and no codes of conduct with any such sources are
required.
Index and Data Reviews
BISL will review the indices (both the rules of construction and data inputs) on a periodic basis,
not less frequently than annually, to determine whether they continue to reasonably measure
the intended u
nderlying market interest, the economic reality or otherwise align with their stated
objective. More frequent reviews may result from extreme market events and/or material
changes to the applicable underlying market interests.
Criteria for data inputs include reliable delivery and active underlying markets. Whether an
applicable market is active depends on whether there are sufficient numbers of transactions (or
other indications of price, such as indicative quotes) in the applicable constituents (or similar
underlying constituent elements) that a price (or other value, as applicable) may be supplied for
such constituent(s).
Other than as set forth in this methodology, there are no minimum liquidity requirements for
index constituents and/or minimum requirements or standards for the quantity or quality of the
input data. However, there are often amount outstanding minimums which function as a proxy
for liquidity.
The review will be conducted by product managers of the indices in connection with the
periodic rebalancing of the indices or as otherwise appropriate.
Any resulting change to this methodology deemed to be material (discussed below) will be
subject to the review of the PROC under the oversight of the BOC, each of which committees
shall be provided all relevant information and materials it requests relating to the change.
Details regarding the PROC and BOC are described above.
Material changes will be reflected and tracked in updated versions of this methodology.
BISL’s index administration is also subject to Bloomberg’s Compliance function which
periodically reviews various aspects of its businesses in order to determine whether it is
adhering to applicable policies and procedures, and assess whether applicable controls are
functioning properly.
Material changes related to the Bloomberg
indices will be made available in advance to affected
stakeholders whose input will be solicited. The stakeholder engagement will set forth the
rationale for any proposed changes as well as the timeframe and process for responses. BISL will
endeavour to provide at least two weeks for review prior to any material change going into
effect. In the event of exigent market circumstances, this period may be shorter. Subject to
requests for confidentiality, stakeholder feedback and BISL’s responses will be made accessible
upon request.
In determining whether a change to the Indices is material, the following factors shall be taken
into account:
● The economic, financial and/or operational impact of the change;
● Whether the change affects the original purpose of the Index; and/or
● Whether the change is consistent with the overall objective of the Index and the underlying
market interest it seeks to measure.
Restatement Policy
Bloomberg makes every effort to provide accurate calculation of its indices. However, to the
extent a material error in index level is uncovered following its publication and dissemination, a
notification will be sent to index clients alerting them of such error and the expected date of a
revised publication, if warranted. Bloomberg considers the following factors to determine
whether to restate. Not all conditions need to be present to warrant a restatement, and certain
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Bloomberg Fixed Income Index Methodology 104
factors may be more determinative that others depending on the circumstances of the given
error.
A. The relative importance of the data field impacted by the error;
B. When the error occurred and when it was discovered;
C. The number of indices and sub-indices affected;
D. Whether the impacted indices are linked to tradable products;
E. The magnitude of the error;
F. The burden of restatement on client re-processing relative to the impact of the error;
G. The impact of the restatement on analytical tools.
General Methodology Considerations
Limitations of the Indices
Though the indices are designed to be representative of the markets they measure or otherwise
align with their stated objective, they may not be representative in every case or achieve their
stated objective in all instances. They are designed and calculated strictly to follow the rules of
this methodology, and any index level or other output is limited in its usefulness to such design
and calculation.
Markets can be volatile, including those market interests which the indices intend to measure or
upon which the indices are dependent in order to achieve their stated objective. For example,
illiquidity can have an impact on the quality or amount of data available to BISL for calculation
and may cause the Indices to produce unpredictable or unanticipated results.
In addition, market trends and changes to market structure may render the objective of the
indices unachievable or to become impractical to replicate by investors.
In particular, the indices measure global fixed income markets. As with all fixed income
investing, the indices are exposed to interest rate risk. The value of bonds fluctuates with the
changes in the interest rate policies established by central banks and the natural movement of
rates over time. Bonds with optionality will also be impacted by interest rate volatilities. Most
fixed income securities often trade at a spread to the base interest rate curve. The level of the
spread reflects the additional premium an investor requires for taking the additional credit risk,
liquidity risk, and other risks. The change of the spread, which reflects primarily the change in
perceived risk of a security, comes from both common forces, affecting all bonds with similar
characteristics, and information specific to a particular issuer. As the indices are designed to
measure those markets, its indices could be materially impacted by market movements, thus
significantly impacting the use or usefulness of the fixings for some or all users.
In addition, certain subindices may be designed to measure smaller subsets of the indices such
as specific sectors, maturities, or credit quality bands. Some of these subindices have very few
qualifying constituents and may have none for a period of time. During such period, the
subindex will continue to be published at its last value, effectively reporting a 0% return, until
new constituents qualify. If no constituents are expected to qualify (due to changes in issuance
trends and other factors), the subindex may be discontinued. In such an event, this
discontinuation will be announced to index users.
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Bloomberg Fixed Income Index Methodology 105
Third Parties
BISL does not use any third parties in:
1. data collection or analysis (other than market data vendors and/or others performing
simple data aggregation or data delivery services);
2. computation or calculation of the official index levels; or
3. dissemination of the indices (other than any redistribution of official index levels).
In the event it does determine to use third parties in the performance of such roles, BISL will
provide details of their function in this methodology and establish appropriate controls in its
internal procedures.
Expert Judgment
BISL may use expert judgment with regards to the following:
● Index restatements
● Extraordinary circumstances during a market emergency
● Data interruptions, issues, and closures
When expert judgment is required, BISL undertakes to be consistent in its application, with
recourse to written procedures outlined in this Methodology and internal procedures manuals.
In certain circumstances exercises of expert judgment are reviewed by senior members of BISL
management and Bloomberg Compliance teams, and are reported to the PROC. BISL also
maintains and enforces a code of ethics to prevent conflicts of interest from inappropriately
influencing index construction, production, and distribution, including the use of expert
judgment.
Reinvestment of Dividends and Coupons
Dividends play no role in this methodology, and are therefore not accounted for by the indices.
Treatment of coupon payments is as described above.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 106
Appendix 10: Environmental, Social and Governance Disclosures
A. Bloomberg Indices
EXPLANATION OF HOW ESG FACTORS ARE REFLECTED IN THE KEY ELEMENTS OF THE BENCHMARK METHODOLOGY
Item 1. Name of the benchmark administrator.
Bloomberg Index Services Limited (“BISL”)
Item 2. Type of benchmark
Fixed Income Corporate
Item 3. Name of the benchmark or family of benchmarks.
Bloomberg Indices
Item 4. Does the benchmark methodology for the benchmark or
family of benchmarks take into account ESG factors?
□ Yes X No
There are sub-families with ESG objectives, which have ESG
statements below, but the parent Bloomberg Indices do not
pursue ESG objectives.
Item 5. If the response to Item 4 is positive, please list below those ESG factors that are taken into account in the benchmark
methodology.
Please explain how those ESG factors are used for the selection, weighting or exclusion of underlying assets.
a) List of environmental factors considered:
N/A
b) List of social factors considered: N/A
c) List of governance factors considered: N/A
Item 6. Data and standards used.
N/A
a) Data input.
Describe whether the data are reported, modelled or, sourced
internally or externally.
Where the data are reported, modelled or sourced externally,
please name the third party data provider.
N/A
b) Verification of data and guaranteeing the quality of those
data.
Describe how data are verified and how the quality of those data
is ensured.
N/A
c) Reference standards
Describe the international standards used in the benchmark
methodology.
N/A
Information updated on:
24 April 2020
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 107
B) Bloomberg MSCI ESG Fixed Income Indices
EXPLANATION OF HOW ESG FACTORS ARE REFLECTED IN THE KEY ELEMENTS OF THE BENCHMARK METHODOLOGY
Item 1. Name of the benchmark administrator. Bloomberg Index Services Limited (“BISL”)
Item 2. Type of benchmark
Fixed Income Corporate Index
Fixed Income Sovereign Index --
Combined ESG Factors
Item 3. Name of the benchmark or family of benchmarks.
Bloomberg MSCI ESG Fixed Income Indices
The index family includes three standard methodologies:
SRI – Controversial business exclusion
Sustainability – ESG-rating based selection
ESG Weighted – ESG-rating based weighting
Item 4. Does the benchmark methodology for the benchmark or
family of benchmarks take into account ESG factors?
X Yes □ No
Item 5. If the response to Item 4 is positive, please list below those ESG factors that are taken into account in the benchmark
methodology.
Please explain how those ESG factors are used for the selection, weighting or exclusion of underlying assets.
a) List of environmental factors considered:
SRI/Sustainability:
MSCI ESG Controversy score – exclusion
Sustainability:
MSCI ESG Rating – selection
ESG Weighted:
MSCI ESG Rating – weighting
Note: some client customized indices use exclusions based on
environmental factors such as:
Fossil fuel tie
Thermal coal revenue %
Artic gas revenue%
Artic oil revenue %
Etc.
b) List of social factors considered:
SRI/Sustainability:
MSCI ESG Controversy score – exclusion
Sustainability:
MSCI ESG Rating – selection
ESG Weighted:
MSCI ESG Rating – weighting
SRI:
Adult entertainment (producer) - Exclusion
Alcohol (producer) – Exclusion
Gambling (operations and support) – Exclusion
Tobacco (producer, retailer, supplier) – Exclusion
Military weapons (conventional / controversial) – Exclusion
Civilian firearms – exclusion
Nuclear power (utility, mining, reactor design) – Exclusion
GMOs - Exclusion
c) List of governance factors considered:
SRI/Sustainability:
MSCI ESG Controversy score – exclusion
Sustainability:
MSCI ESG Rating – selection
ESG Weighted:
MSCI ESG Rating – weighting
Item 6. Data and standards used.
a) Data input.
The starting universes of index constituents are the Bloomberg
fixed income indices (Global IG and HY).
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 108
Describe whether the data are reported, modelled or, sourced
internally or externally.
Where the data are reported, modelled or sourced externally,
please name the third party data provider.
All ESG data used in the Bloomberg MSCI ESG indices is
sourced externally.
The Bloomberg MSCI ESG Index family uses MSCI ESG Ratings
and business exclusion data. MSCI ESG Ratings were developed
through over 40 years of experience through legacy companies
collecting, cleaning, standardizing and modelling ESG data from
thousands of sources to create a precision tool for a clear signal
of ESG performance. Companies are rated on a 7-point ‘AAA’ to
‘CCC’ scale according to their exposure to industry-specific ESG
risks and their ability to manage those risks relative to peers.
b) Verification of data and guaranteeing the quality of those
data.
Describe how data are verified and how the quality of those data
is ensured.
Data is received from MSCI via secure transmission.
BISL is a registered benchmark administrator who adheres to the
rules and regulations set forth by BMR and subsequent
governing body jurisdictions.
BISL’s index administration is also subject to Bloomberg’s
compliance function which periodically reviews various aspects
of its business to ensure it is adhering to applicable policies and
procedures, and to assess whether or applicable controls are
functioning properly.
c) Reference standards
Describe the international standards used in the benchmark
methodology.
Bloomberg is a registered benchmark administrator adhering to
rules and regulations set forth by BMR. All calculations, inputs,
optimization constraints, and pricing are transparently
documented in the Index Methodology.
Information updated on:
24 April 2020
C) Bloomberg SASB Fixed Income Indices
120
EXPLANATION OF HOW ESG FACTORS ARE REFLECTED IN THE KEY ELEMENTS OF THE BENCHMARK METHODOLOGY*
Item 1. Name of the benchmark administrator. Bloomberg Index Services Limited (“BISL”)
Item 2. Type of benchmark
Equity and Fixed Income Corporate Benchmarks – Combined ESG
Factors
Item 3. Name of the benchmark or family of benchmarks.
Bloomberg SASB ESG Equity Indices:
Bloomberg SASB US Large Cap ESG Ex-Controversies Select Price
/ Total Return Index
Bloomberg SASB US Large Cap Growth ESG Ex-Controversies
Select Price / Total Return Index
Bloomberg SASB US Large Cap Value ESG Ex-
Controversies Select
Price / Total Return Index
Bloomberg SASB US Large Cap Dividend Yield ESG Ex-
Controversies Select Price / Total Return Index
Bloomberg SASB US Large Cap ESG Select Price / Total Return
Index
Bloomberg SASB Fixed Income Indices:
Bloomberg SASB US Corporate ESG Ex-Controversies Select Index
Bloomberg SASB US Corporate ESG Select Index
Bloomberg SASB US Corporate ESG Ex-Controversies Index
Bloomberg SASB US Corporate ESG Index
Bloomberg SASB Euro Corporate ESG Ex-Controversies Select
Index
120
For the Bloomberg SASB Equity Indices referred to below, see https://www.bloomberg.com/professional/product/indices/sasb-resources/.
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 109
Item 4. Does the benchmark methodology for the benchmark
or family of benchmarks take into account ESG factors?
X Yes □ No
Item 5. If the response to Item 4 is positive, please list below those ESG factors that are taken into account in the benchmark
methodology.
Please explain how those ESG factors are used for the selection, weighting or exclusion of underlying assets.
a) List of environmental factors considered:
Selection, weighting or exclusion:
Thermal Coal Extraction – exclusion
All other index constituents are members of the base index on
which the Bloomberg SASB indices are created: Bloomberg US
Large Cap (B500), Bloomberg US Corporate (LUCA), Bloomberg
Euro Corporate (LECP).
Please see appendix for full description of the Bloomberg SASB
Index Construction, including R-Factor score composition.
b) List of social factors considered:
Selection, weighting or exclusion:
Extreme Event Controversies – Exclusion
Controversial Weapons – Exclusion
Civilian Firearms – Exclusion
Tobacco – Exclusion
All other index constituents are members of the base index on
which the Bloomberg SASB indices are created: Bloomberg US
Large Cap (B500), Bloomberg US Corporate (LUCA), Bloomberg
Euro Corporate (LECP)..
Please see appendix for full description of the Bloomberg SASB
Index Construction, including R-Factor score composition.
c) List of governance factors considered:
Selection, weighting or exclusion:
UNGC Violations – Exclusion
All other index constituents are members of the base index on
which the Bloomberg SASB indices are created: Bloomberg US
Large Cap (B500), Bloomberg US Corporate (LUCA), Bloomberg
Euro Corporate (LECP)..
Please see appendix for full description of the Bloomberg SASB
Index Construction, including R-Factor score composition.
Item 6. Data and standards used.
a) Data input.
Describe whether the data are reported, modelled or, sourced
internally or externally.
Where the data are reported, modelled or sourced externally,
please name the third party data provider.
The starting universes of index constituents for the Bloomberg
SASB indices are determined by the Bloomberg “Base Indices”:
Equity:
Bloomberg US Large Cap (B500)
Fixed Income:
Bloomberg US Corporate (LUCA), Bloomberg Euro Corporate
(LECP).
State Street Global Advisors (SSGA) provides the list of
constituents that will be excluded from the Base index based on
business involvement. SSGA additionally provides R-Factor (ESG)
Bloomberg Fixed Income Indices August 24, 2021
Bloomberg Fixed Income Index Methodology 110
scores for index constituents, which determine the weight of
constituents in the index.
R-Factor scores are proprietary scores generated by SSgA from a
composite framework of underlying ESG score providers (ISS-ESG,
Sustainalytics, and Vigeo-EIRIS.)
Bloomberg is not currently privy to the underlying data provided
by each of the ESG Score providers. Please see below for an
additional explanation of R-Factor.
b) Verification of data and guaranteeing the quality of those
data.
Describe how data are verified and how the quality of those
data is ensured.
Data is received from State Street Global Advisors via secure
transmission.
BISL is a registered benchmark administrator who adheres to the
rules and regulations set forth by BMR and subsequent governing
body jurisdictions.
BISL’s index administration is also subject to Bloomberg’s
compliance function which periodically reviews various aspects of
its business to ensure it is adhering to applicable policies and
procedures, and to assess whether or applicable controls are
functioning properly.
c) Reference standards
Describe the international standards used in the benchmark
methodology.
The Sustainability Accounting Standards Board (SASB) standards
serve as the basis for the “ESG” component of the R-Factor score.
Bloomberg is a registered benchmark administrator adhering to
rules and regulations set forth by BMR. All calculations, inputs,
optimization constraints, and pricing are transparently
documented in the Index Methodology.
Information updated on: April 21, 2020
Appendix Information:
The Bloomberg SASB ESG Equity and Fixed Income indices are designed to be socially responsible investment benchmarks
derived from the Bloomberg size and style equity indices and the Bloomberg fixed income indices.
The policy benchmarks in the Bloomberg SASB ESG family use a tilting methodology to reallocate equity/issuer weights based on
an ESG metric called R-Factor, which is designed to measure the performance of a company’s business operations and governance
as it relates to financially material ESG challenges facing the company’s industry
The “Select” index variants are optimized to maximize exposure to the ESG score, while maintaining similar risk/return
characteristics to the base indices.
Responsible investing requires a tool to measure the performance of a company’s business operations and governance as it relates
to financially material ESG challenges facing the company’s industry. State Street Global Advisors’ R-Factor TM is designed to be
this mechanism. The score draws on data from multiple providers, and leverages widely accepted, transparent materiality
frameworks to generate a unique ESG score for listed companies. It was designed to offer companies and investors greater
transparency about which financially material ESG issues drive a company’s score — and, ultimately, to help build more sustainable
capital markets. At the core of R-FactorTM score is a mapping algorithm that uses metrics that are “financially material” across 77
industries and 17 regulatory regimes. The methodology was designed around a transparent analytical framework and the standards
of the Sustainability Accounting Standards Board (SASB).
* For additional ESG disclosure data for our equity benchmarks, please visit the Bloomberg Indices website.
Bloomberg Fixed Income Indices August 24, 2021
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