International index company FTSE published a preliminary survey ahead of its annual revision of its global bond index methodology. The mountain of announcements in it included a short sentence stating that Israel met the threshold conditions for FTSE's flagship World Government Bond Index (WGBI).
It is important to note that this announcement is not FTSE's final decision, which will be published in several months' time. If the situation does not change by then, Israeli government bonds will be added to one of the world's most important indices.
The attention of investors in global indices products is naturally drawn to the world's leading share indices, such as MSCI Emerging Markets, MSCI World, and the main indices of the most important countries, such as the US, Germany, Japan, and others. The global bond market receives far less coverage, and even investors in bond index products are familiar mainly with indices such as iBoxx and certain indices of Bloomberg Barclays.
In the global government debt sector, there are two main indices on which the major investment institutions in the world focus: JP Morgan Government Bond - Emerging Markets Global Core (EMBI) and FTSE's WGBI. Both of them focus on bonds denominated in local currency, but there is a significant difference between them. While EMBI specializes in government bonds in emerging markets, WGBI is a market value index that covers all government bonds, with no distinction between developed and emerging markets, provided that they meet its rigorous conditions.
As of now, this index contains 1,033 bond series issued by 23 different countries. The value of the bonds constituting the index's underlying asset is over $20 trillion.
38% of the index consists of US government bonds and 19% of Japanese government bonds. One third is based on bonds of Euro bloc countries, and the remainder consists of bonds from the rest of the world, headed by the UK with 5% of the index.
Incidentally, as an asset in itself, this index is not particularly attractive. Its internal rate of return is a mere 1.3% of bonds with a duration of over eight years. Its current international credit rating is AA.
Yaniv Kunis is founder and CEO at Index Research, an Israeli-based index provider specializing in research and development, calculation and maintenance of fixed income and equity indices.
Published by Globes, Israel business news - en.globes.co.il - on April 28, 2019
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