Since the early years of liability-driven investing (LDI), many defined benefit (DB) pension plan sponsors have cast a wide net for investments to reap higher returns and hedge long-term plan liabilities. While this has led some sponsors toward ever more creative and less traditional avenues to access long duration, the core hedging assets in most LDI programs remain investment-grade government and credit bonds, often weighted toward the long end (maturities of 10 years or more).
Understanding the composition of this universe of long bonds is crucial for plan sponsors seeking to craft an effective investment strategy. To help, we have developed a map of the long bond market using the Bloomberg Barclays U.S. Long Government/Credit (LGC) Index. The constituent bonds of the LGC index collectively remain widely recognized as the universe of basic hedging assets available to liability-minded DB plan sponsors.
Map of U.S. Long Government/Credit Index
Source: Barclays POINT. Data in market value terms as of 3/31/19. Split by index, then credit quality, then sector.
*”Long STRIPS” refers to U.S. Treasury STRIPS with maturities of at least 10 years, which are not part of the LGC index, but which are included to indicate relative sizing.
† ”Sovereign etc.” includes additional small sectors beyond sovereign.
One key takeaway from this map is that the AA-quality segment of corporate bonds in the long end of the market is rather small. While these bonds play an important role in pension liability measurement, it’s clear that prudent investors must broaden their investments beyond AA-rated bonds, simply due to their limited depth and breadth. Our map offers a window into other, much larger areas of the market where sponsors can shop for hedging instruments.
While the map is a useful tool to help sponsors visualize the market, it is simply a snapshot. In practice, the long bond market is far from static, as patterns of credit issuance evolve over time. As the market value of the LGC index has increased since the late 1980s, the proportions of the underlying components have changed significantly and credit quality has gradually declined.
For more detail on the long bond market, please download our white paper, “Charting the LDI opportunity set.”