Are you over-investing in the most indebted issuers?

Kevin Corrigan, head of fundamental fixed income at Lombard Odier Investment Managers, explains how conventional market cap indices often leave bond investors exposed to the countries and companies that are borrowing the most.

Why do traditional bond indexes encourage investors to buy more bonds from the companies and countries that have already borrowed the most?  Imagine a bank manager lending more to a customer simply because they have already borrowed plenty. He would be dismissed - and rightly so. Yet this is the approach a conventional bond market capitalisation index takes. This approach and the recent vast appetite for borrowing by countries and companies means bond investors are now facing a clear and present danger. Government bond indexes today are concentrated on the most indebted countries, whi...