When it comes to issuing debt, no entity surpasses the U.S. government. In 2024 the Federal government net issued $1.9 trillion in new marketable debt including over $1.3 trillion in bonds and notes eligible for the Bloomberg Aggregate Index. As the chart shows, Treasury bonds now represent 45% of the Bloomberg Agg Index, up from 25% in 2005, underscoring how dramatically the index has shifted in recent years.
There are significant differences in the mechanics of how stock and bond indices are constructed. All market cap indices and the associated index funds allocate to securities based on the market value of securities outstanding. In equity indices, outperforming stocks typically see their index weights increase as their market values rise. For bonds, index weights are determined by the total amount of debt securities outstanding, meaning that entities that borrow more will become a larger part of the index. Therefore, a bond index fund will have a higher exposure to companies and governments that issue more debt. A higher debt burden is not a positive credit attribute.
As government deficits are persistent, the amount of relatively lower yielding Treasury bonds in benchmark bond indexes is going to continue to grow. Owning a larger and increasing amount of Treasury bonds due to government deficit spending, associated bond issuance, and bond index construction methodology is probably not the optimal fixed income strategy. Active bond managers should be able to continue to find opportunities to outperform the evolving and often inefficient bond indices.
The shifting nature of bond indices highlights the importance of regularly reviewing fixed income allocations and considering whether a passive fixed income approach remains well suited for today’s evolving market environment.