There are some things in life I just don’t get, like The Bachelor, my kids’ music preferences, and avocado toast. It’s not that I dislike these things; I’m just not a fan.¹ I also don’t get recent claims that the Barclays U.S. Aggregate Index (the “U.S. Agg”) is now somehow greatly different than it was.

The assertion seems to be that the U.S. Agg isn’t as good of a bond index because it is overweight U.S. Treasuries. Some have expanded the focus to say that it has too big of a weight in government bonds.

Figure 1 shows the U.S. Agg’s historical sector weights. While the weight of Treasuries has fluctuated a bit over time, its current proportion looks pretty much in line with the historical average. For those who prefer to use a broader definition of government bonds, I’ve stacked government-related (which includes U.S. agencies) and agency mortgage-backed securities (MBS) on top of Treasuries. If one considers all three (blue, red, and green together) to be a form of government bonds, it looks like their combined weight has been consistent over time, especially considering that the ‘70s and early ‘80s were a time when agency MBS were “ramping up” into the marketplace.

Figure 1

Barclays U.S. Aggregate Index sector weights

Sources: Vanguard calculations using Barclays’ data. January 1977 through December 2017.

The argument is that too much government bond exposure leads to lower yields, thus hurting investors. Figure 2 debunks that argument. Regardless of how the sectors are officially classified, market participants determine the amount of compensation they demand for credit and prepayment risk in the form of “spread.” Figure 2 quantifies the spread as the difference between the yield to worst of the U.S. Agg and the yield to worst of the Barclays U.S. Treasury Index.

Figure 2

Amount of spread in Barclays U.S. Aggregate Index


Sources: Vanguard calculations using Barclays’ data. January 1976 through December 2017.

Yes, the spread fluctuates and yes, there was a big spike at the time of the global financial crisis. However, the current amount of spread seems to be around the long-term trend, maybe actually a bit higher.

As Vanguard has noted before, investment-grade bonds remain a good source of diversification. Low-cost index funds and ETFs that track the U.S. Agg are a great way to access the exposure. As far as the notion goes that the U.S. Agg is vastly different today than it was in the past? I just don’t get it.

I would like to thank my colleagues David Walker and Joshua Hirt for their contributions to this blog.

¹ I like avocados and I like toast, but spreading avocado on toast, in my opinion, doesn’t magically make the sum better than the parts.


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