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T he market value of all fixed-income (FI) securities outstanding in the United States as of September 2015 was $36.68 trillion--46% more than the $25.08 trillion total market value of U.S. stocks. As of the same date, the outstanding market value of the world FI market was $87.82 trillion--37% more than the $64.24 trillion world stock market value. 1 The sheer size of the bond market relative to the stock market, either domestically or globally, highlights the importance of asset allocation to the FI market.
Traditionally, stock market investors have relied on stock indices to track the average performance of the broad market and/or various market sectors. U.S. stock indices, such as the well-known Dow Jones Industrial Average (DJIA), the popular S&P 500 Index and NASDAQ 100 Index, and the broad Wilshire 5000 Index, are widely publicized in real time and in historical data format. Their composition and computation are also generally well understood, and data for them are widely available. In contrast, the financial press, using a simple and narrow matrix, typically represents the bond market by Treasury yields. Although total return-based bond market indices have been in existence for more than four decades, they have been associated with low transparency and lack of data availability, especially to retail investors.
From an asset allocation perspective, portfolio management and optimization require the return and risk input from each risky asset class, and return-based bond market indices can capture the return and risk performance of the FI market. Unlike stock indices that can be easily created based on publicly available stock price and dividend data, FI indexing is far more challenging.
First, bonds are traded over the counter (OTC). As a result, detailed yield, price, and return data on individual bond issues are not publicly available. These data are typically obtained from bond dealers or through subscription to professional databases, such as GovPX or Bloomberg. Second, many bond issues are not frequently traded, which requires technical expertise from bond dealers using either trader-pricing or matrix-pricing to supplement the data from actual transaction prices. Third, bonds can differ dramatically according to issuer, sector, maturity, credit rating, optionality, coupon design, taxability, and so on, making bonds far more diverse and heterogeneous than common stocks. Fourth, in addition...