Minimum issue screens in global aggregate bond indices: a cost/benefit analysis

A $500 million minimum issue-size screen could make global aggregate bond benchmarks more investable and scalable while producing only modest diversification, currency and risk trade-offs.

• Applied to the Bloomberg Global Aggregate, Global Aggregate 1-5 Year and Global Aggregate 1-3 Year indices, the screen removes 26%, 29% and 31% of securities respectively, while reducing issuer counts by 25%, 23% and 24%.
• The exclusions are concentrated in smaller issues: securitised securities account for about 50% of removals in the full index but only 1.24% of its weight, and total market-value exposure removed ranges from 2.9% to 5.3%.
• Issuer concentration rises only modestly, with the full-index HHI increasing from about 0.055 to 0.058, the largest issuer rising from 19.11% to 19.69%, and the top 10 issuers from 54.10% to 55.68%.
• Risk changes are limited: yield to maturity falls by 2-4 basis points, option-adjusted spread tightens by 1-2 basis points, duration is unchanged, and effective currency concentration moves only from 3.57 to 3.60.
• Credit quality improves marginally through lower BBB exposure and slightly higher weights in better-rated buckets, while the estimated implementation costs decline under the modelling assumptions.

Takeaway: The 500MM methodology appears to improve benchmark investability by removing many small, less liquid bonds while preserving most market exposure, but the conclusions are theoretical because realised liquidity, turnover, tracking error and execution costs were not directly measured.