Just When You Thought It Was Only Stock Indexes

April 01, 1999

With so many new stock indexes making their debuts, bond indexes might seem lost in the shuffle. But the field has not been neglected. Europe is taking the lead in offering new debt-related securities indexes in the wake of the Euro; new bond indexes covering Australia and the U.S real estate market have also been introduced.

Deutsche Borse

Deutsche Borse has announced a new series of pan-European and euro-zone bond indexes for both institutional and individual investors.

Aiming for a September launch, Germany's main securities exchange said it plans to introduce a family of pan-European government bond indexes (which will exclude Greek and Norwegian bonds) as well as indexes that cover 10 of the 11 nations that have adopted Europe's common currency, the euro. (The exception will be Luxembourg. The 10 other euro-zone nations are Germany, France, the Netherlands, Belgium, Italy, Spain, Portugal, Austria, Finland and Ireland.)

Each of the aggregate indexes and those for individual European government bond markets will be calculated for securities with maturities of one to 10 years. The exchange will also calculate its pan-European and euro-zone indexes for 15, 20 and 30-year maturities.

Many companies, including Standard & Poor's, Datastream Systems Inc., and commercial and investment banks, already provide European fixed-income indexes. While some are used as the basis for custom-made derivative products, none have become the basis for standardized futures and options contracts traded on exchanges.

"What is significant about the (Deutsche Borse) indexes is that not only are they pan-European and pan-euroland (as the eurozone is informally called), but they will also be exchange-traded, which makes them far more useful for many investors," said John Butler, chief market strategist at Dresdner Bank AG in Frankfurt.

The exchange also said that bond funds and index-linked warrants based on the new indexes could be designed for individual investors, and that institutional investors could create derivative products using the indexes as the underlying instrument.

As of the end of 1998, the market for domestic and international fixed-income securities denominated in euros equaled $6.6 trillion, compared with $13.1 trillion for U.S. dollar-denominated securities, according to Merrill Lynch & Co. The German bond market alone at year end stood at $2.1 trillion.


The Wiener Borse has already introduced a family of bond indexes intended to cover Central and Eastern Europe, the CECE Bond Indexes. The indexes, launched in May, cover the government fixed-income bond markets of Poland (PBX), the Czech Republic (CBX) and Hungary (HBX). The borse calculates separate price and total return indexes in local currencies and in euros for government bonds with terms ranging from 2.6 to 5.2 years and from 1.5 to 2.5 years. The borse also plans to add compound regional indexes (VISBX) which combine the indexes of the three countries. As trading environments stabilize within the region, the borse expects to be able to include countries such as Slovakia, Russia, Ukraine, Romania and Croatia.

Warburg Dillon Read

On July 6, Warburg Dillon Read launched its European Credit Indexes family of indexes designed for the post-euro bond market. The new indexes seek to track highly liquid, very large bonds aimed at the institutional market.

"Our approach is slightly different from everything else in that we're not launching just one index per se; we're launching a family of indexes, with each index having a particular point behind it. We're looking at very large size, highly tradable bonds, bonds that are aimed at the institutional element of the market, rather than retail or domestic elements," said John O'Mahoney, the head of European Credit Indexes WDR.

The other principal players in the European credit market are Merrill Lynch, J.P. Morgan and Barclays, O'Mahoney said.

WDR's new family of indexes also includes a stand-alone (but still compatible) index focusing on the Pfandbriefe market. It contains bonds that have a minimum nominal outstanding of 1.5 billion euro.

WDR has also broadened its coverage of the Australian bond market with the establishment in May of a corporate bond index containing securities rated as low as triple-B-minus. Previously, WDR's existing indexes had only included corporate bonds with ratings of single-A-minus or higher.

Banc of America Securities

NationsBanc Montgomery Securities, now Banc of America Securities and a subsidiary of Bank of America, launched a new bond index on April 22. The new index tracks the total return of triple-A-rated 10-year securities backed by commercial mortgages and is designed as a complement to the Commercial Mortgage-Backed Securities Index which was launched last year. The triple-A-rated 10-year index represents the largest and most liquid components of the CMBS index, making it a more easily replicated index, said Michael Youngblood, managing director of real estate at Banc of America.


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