The Deutsche Börse is bidding to have the key benchmark for euro issues with the introduction of a new European bond index family.
The new indices are designed to serve as a benchmark to track the performance of fixed income securities on a pan-European level. For investors, they aim to offer a new basis for investments in bond funds and warrants, while for professional traders, they will serve as an underlying instrument for derivatives products.
An aggregate index and maturity indices from one to 10 years will be calculated for every segment, that is Euro-zone and pan-European area, and for every country represented in these segments.
Frank Hartmann, a spokesman for the Börse, comments: “We want to provide a benchmark for the pan-European issues market because we feel the market is demanding it and no one has produced such an index yet”. He recognises that well-known index providers such as Merrill Lynch, Lehman Brothers and Salomon Smith Barney are actively pursuing the development of euro indices but is waiting for the market to build, particularly in the high-yield sector. Hartmann says: “The most important issue is that Deutsche Börse is an independent provider, whereas the competition, the major investment banks, have a degree of self-interest.”
So what is the Börse’s motivation? “Indices are an important yardstick for the measurement of market trends,” says Hartmann. “The new bond index family will expand our current range in what is the second biggest bond market worldwide.”
The new indices, to be launched in September, will be calculated for countries within the European Economic Area, excepting Greece and Norway, as well as the Euro-zone, excepting Luxembourg. Additional indices for 15, 20 and 30-year maturities will be calculated for the aggregate Euro-zone and European area. The indices will be calculated for both price and performance. Moreover, in view of the special needs of investment funds, Deutsche Börse has decided to design the new product group as synthetic indices and basket indices. In the case of synthetic indices, the maturity is constant; in the case of basket indices the maturity fluctuates along with those of the constituent bonds.
The Deutsche Börse’s entry to the index arena is a sign that the euro fixed income market is reaching a sufficient size, even if it is still fairly narrow. Currently, most euro indices are highly concentrated in sovereign debt. The growth of corporate issuance is a major catalyst for the development of euro bond indices. Institutional investors are comfortable constructing a well diversified portfolio with current issues because investment portfolios in credits are small in relationship to capitalisation. Moreover, the process of constructing a portfolio will involve mostly participation in new issues. So the growth of issue volume and the rating and sector spread of new issues is important for the future sophistication of euro indexing.
The investment banks have been active in the euro index area in recent months, with both Merrill Lynch and Lehman Brothers introducing pan-European indices. Standard & Poor’s has stated that it plans to launch a range of euro bond index products later in the year. The lack of maturity in the euro bond market means it is going to be some time before a meaningful derivatives market exists, allowing investors to use the swaps market as a hedge. Richard Newell