Global Financial Data Adds 20 GDP-Weighted Global Bond Indices
Bryan Taylor, Chief Economist, Global Financial Data
Global Financial data has added 20 new indices aggregating the data from its proprietary bond indices to create global fixed income series using data from over 50 countries. A price index and return index is provided for each aggregate. These additions provide a significant increase in the historical coverage of GFD’s bond indices. The starting date for the previous World Government Bond Index was 1923, but the updated World Bond Index begins in 1700.
The new bond indices include
World Government Bond Index (begins in 1700)
World x/USA Government Bond Index (begins in 1700)
G7 Government Bond Index (begins in 1700)
Developed Countries Government Bond Index (begins in 1700)
Developed x/USA Government Bond Index (begins in 1700)
Emerging Markets Government Bond Index (begins in 1722)
Asia Government Bond Index (begins in 1722)
Europe Government Bond Index (begins in 1700)
North America Government Bond Index (begins in 1786)
Latin America Government Bond Index (begins in 1822)
These bond indices are weighted by GDP, rather than by the value of outstanding government debt. Given the period of 300 years that is covered, we determined that GDP weighting provided the most consistent methodology.
Using debt outstanding as a weighting methodology was impractical not only because of the lack of historical data on bonds outstanding, but also because of the numerous ways in which the outstanding amount of bonds could change. The value of government debt outstanding fluctuated more dramatically than GDP over time, sometimes falling to zero as governments paid off their debts or inflated their way out of their debt. In other cases, governments defaulted on their debt, converted their external debt into internal debt, defaulted on their internal debt but not their external debt, reorganized their debt, forcing bondholders to take a haircut, and so forth. Wars caused sudden increases in outstanding debt while defaults wiped out a large portion of the debt. Central governments could accept responsibility for state debts, or repudiate them.
The United States provides several examples of how dramatically the amount of outstanding debt could fluctuate. The US reorganized its debts under Alexander Hamilton in the 1790s issuing new bonds, some of which did not pay any interest for ten years. The United States Federal Government completely paid off its debts in the 1830s, but individual states still had debt and issued bonds. After the Civil War, the Federal Government gradually paid down its debts, but railroads raised enormous amounts of debt.
Several countries, such as Imperial Russia, the Confederacy, and others completely defaulted on their debt. During the 1800s, Great Britain gradually paid off the debts it had accumulated during the Napoleonic Wars, while France added to its debt. Germany inflated its way out of its internal debts during its hyperinflation in the 1920s, and was in default on its foreign debt during World War II.
Some countries, historically, did not have a central government at all. Italy and Germany didn’t exist as countries in 1850, so any calculation of “national” debt would have to aggregate the debt of individual states. The same is true of South Africa and Australia. If you include state debt for these countries, why not include state debt for the United States, Canada and other decentralized countries? The United States took on the debt of individual states after the Revolutionary War, but refused to take on the debt of individual states and the Confederacy after the Civil War.
Although most aggregate bond indices today rely upon the value of outstanding debt as a weighting factor, the dramatic differences in debt from one country to another can create problems. US GDP is about three times Japan’s GDP, but the United States’ federal government debt is only about 50% greater than Japan’s government debt. Consequently, S&P’s World Government Bond Index gives about one-third of its weight to the United States, one-third to Europe and one-fourth to Japan. Since Japan has had significantly lower interest rates than the rest of the world for the past 25 years, weighting by debt outstanding creates a lower average government bond yield than weighting by GDP.
There is also a “free float” problem with weighting by outstanding debt. In order to keep interest rates low, central banks in developed countries have bought government debt and added this debt to its balance sheet. About one-third of Japan’s government debt is currently held by the Japanese government itself. For many years, the Chinese government has held hundreds of billions of dollars of United States debt, and since Greece’s default, almost all of Greece’s debt has been owned by governments or central banks, not by the private sector. If government bond indices were to only include the amount available to investors and not held by governments, additional adjustments would have to be made in the weighting of each country.
For all these reasons, the returns to a GDP-weighted bond index differ from the returns to a capitalization-weighted bond index. In particular, countries, like Japan, which have a high level of government debt will impose an outsize influence on the index. Since Japan’s bond yields have been consistently lower than bond yields in other countries, a value-weighted Bond Index will provide lower returns than a GDP-weighted Index.
The World Government Bond Index and the World x/USA Government Bond Index are provided to all subscribers to the GFDatabase. The other indices are available through a subscription to either the GFD Indices or the Fixed Income Securities Database.
To get more information on these indices, or if you would like a list of the indices and the companies that have been added, call today to speak to one of our sales representatives at 877-DATA-999 or 949-542-4200.
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