Goldman Sachs is not the only institution to launch a set of global bond indices. But what sets its family of credit indices apart from the competition is the liquidity indices within each category, the investment bank says.
“Where we have tried to distinguish ourselves is in the ‘Top’ indices,” says Willem Sels, executive director of Goldman Sachs. “They comprise the most liquid bonds in that environment, but they also track the aggregate,” he says.
This summer, Goldman Sachs completed its family of global credit indices by adding the US$ Investment Grade Index. The three existing members are Euro Investment Grade, European High Yield and US$ High Yield.
The liquidity, or Top, indices run alongside each of these broad market capitalisation indices. They consist of bonds, in each category, chosen to maximise liquidity and keep a good representation of the broad market, Goldman Sachs says.
“For the moment, as far as we are aware, we are the only ones to have these liquid indices with constant pricing,” he says. The indices are calculated in real time, and available through quote vendors Bloomberg and Reuters and on the Goldman Sachs website.
Goldman Sachs aims to have financial products launched on the back on the indices. And already, there has been institutional interest in the benchmarks, says Sels, though he declines to give further details.
The other major advantage of Goldman Sachs’ credit indices over those already available, says Sels, is the way the bonds underlying the indices are priced. Prices are used from traders who are not simply quoting a spread over the government benchmark. “These are real prices and not matrix prices which caused stickiness in traditional indices,” he says.
Part of the reason why the index is able to avoid having to resort to matrix pricing is that it restricts its indices to include only those corporate bonds with a minimum issued amount of $500m. This currently limits the number of issues to 288 bonds for the euro investment grade index, for example.
Why is there a demand for yet more bond indices? The US fixed income markets have changed dramatically in the last decade, with new issuance of investment grade bonds almost quadrupling since the early 1990s.
Goldman Sachs says that with this growth, a need has arisen for indices which focus specifically on this sector of the market. Corporate bonds are not like the government market – they have distinct analytical requirements, the bank says, that call for “appropriate, specialised, focused benchmarks”.
In many cases, investors with bond portfolios now want to take more non-government exposure within that to take advantage of the spread pick-up and diversification benefits, says Sels.
And there are far more funds that are now dedicated to pure credit. The Goldman Sachs indices are particularly suitable for this type of investment, because they are based on a restricted world of pure credit, and do not include government notes, Pfandbriefe or state railway bonds, says Sels.