New research from the EDHEC Risk Institute shows a worrying trend in corporate bond indices. According to the paper such indices expose investors to an increasing amount of risk as they become more investible. The paper considers eight indices for investment-grade fixed income – four euro-denominated and four U.S. – and finds that US-denominated indices have higher credit risk. According to the authors:
“Although the indices in each market resemble each other, there are still some differences. Moreover, an analysis of the stability of the indices’ risk exposures (interest rate and credit risks) reveals very unstable measures over time and, perhaps most importantly, this instability is accentuated in the two indices with the smallest number of bonds: the more investable the index is meant to be, the less reliable it is. Finally, we find great differences between US and euro-denominated indices: US corporate bond indices showed higher credit risk, with longer terms to maturity and hence longer durations.”
You can download the full paper here.