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What is the Lehman Aggregate Bond Index?

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  • Written By: John Lister
  • Edited By: Kristen Osborne
  • Last Modified Date: 18 November 2016
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The Lehman Aggregate Bond Index is the former and most well known name of an index of United States investment grade bonds. It is officially known as the Barclays Capital Aggregate Bond Index. As one of the best known bond indices, it is used as the basis of several index-based funds.

The aim of the Lehman Aggregate Bond Index is to track the performance of most investment grade bonds. These are bonds that meet a certain credit rating, most prominently BBB- or higher from Standard and Poor. These ratings assess the likelihood that a bond issuer will default on repayment, which in turn affects the interest rate they have to offer to attract investors. Bonds that do not meet the minimum rating for investment grade are commonly known as junk bonds.

The Lehman Aggregate Bond Index is a broad base index. This means it covers all relevant securities, rather than selecting those of the largest companies or a representative sample. It covers both government-backed bonds such as most Treasury securities, and corporate bonds. For tax reasons, the index does not cover municipal bonds or Treasury securities that are protected against inflation.

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The index is market capitalization-weighted. This means that the index is not calculated by simply averaging the price movements of each bond. Instead, the calculation gives different emphasis, or weighting, to different bonds. This weighting is based on the market capitalization of the bond, which is the price of the bond multiplied by the number of bonds on issue, or the total market value of all the bonds that are on issue. The larger its market capitalization, the greater the effect a particular bond's price changes has on the index.

Investors cannot invest directly into the index itself. There are a wide range of index and exchange-traded funds that aim to track the index. This involves fund managers buying and selling stocks so the fund's portfolio is in proportion to the index. Because the fund is market-capitalization weighted, this usually means fund managers will need to buy bonds that are rising in price and sell those that are decreasing in price. This may seem counter-intuitive, but as long as the fund manager does this accurately, investors in the fund will make an overall profit if the index rises.

The Lehman Aggregate Bond Index name was dropped after Lehman Brothers, which used to operate the index, collapsed in 2008. After the company's bankruptcy, Barclays took over several of its assets, including its index operations. The index was rebranded as the Barclays Capital Aggregate Bond Index.

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