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Partner Perspectives: Precision in a Shifting Bond Landscape · Look Forward

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Welcome to Partner Perspectives, a thought leadership initiative from S&P Global that
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brings leading institutions together to examine the trends shaping global markets
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and deliver forward-looking analysis that helps market participants navigate
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uncertainty, identify opportunities, and anticipate what's ahead This miniseries
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within the Look Forward podcast spotlights our first volume produced
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jointly with Vanguard entitled Partner Perspectives: The Future of Capital
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Markets, Unlocking Potential Ahead.
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Across three episodes, we explore the key themes at the heart of this
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research, including shifts in global market structure, index diversification,
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fixed income resilience, and the evolution of private markets.
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Leaders from S&P Global and Vanguard alike discuss what these changes could
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mean for investors, institutions, and the broader market ecosystem.
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Our third episode takes a closer look at the shifting fixed income
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landscape, covering how supply and demand momentum in bond markets are
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contending with a more fractured world, and how the right benchmarks
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can help investors stay on track.
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Having adapted to the end of the zero interest rate policy era, global bond
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markets are facing a new frontier of dynamics and transformations against the
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backdrop of uncertainty and volatility.
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Market buoyancy is being largely shaped by the tech sector,
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particularly with expectations for AI's disruptive potential.
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The digitalization of financial markets promises greater fluidity in capital
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movements, and the rapid growth of ETFs is adding a new layer of liquidity.
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Innovations in bond market infrastructure and the development
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of fixed income exchange traded funds support longer term market prospects.
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Our conversation starts with an exploration of the structural shifts
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that are reshaping the global bond market with Alex Birry, Head of Credit
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Research and Insights at S&P Global Ratings, and Matt Cheshum, Executive
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Director of Equity and Analytic Products at S&P Global Market Intelligence.
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Their research highlights how cautious optimism for how innovation is laying
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the groundwork for greater efficiency and flexibility in bond markets, even if the
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journey remains complex and nonlinear.
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Then we dive deep into the technicals of benchmarking in bond markets with
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Jeffrey Johnson, Head of Fixed Income Product at Vanguard, to learn how bond
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index fund managers balance the need to maintain their benchmark alignment
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while capitalizing on opportunities during periods of market uncertainty.
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We're together to talk about how bond markets are changing, and although
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I'm eager to jump headfirst into discussing innovation in fixed income,
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I'd be remiss to skip the fundamentals.
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Starting with you, Alex, your team in S&P Global Ratings analyzes
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issuance, financing conditions, and other key risk indicators.
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Against the backdrop of our world in disruption, what is the
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state of the bond market today?
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Geopolitics, uh, clearly, uh, dominates the, uh, conversation
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right now, and particularly the, uh, conflict in the, uh, Middle East.
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And I think markets are really, uh, grappling with uncertainty around
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the, uh, duration of the, um, effective closure of the Strait of
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Hormuz and the, uh, potential impact on the, on critical infrastructure.
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So all that really feeds into, uh, energy price, uh, volatility, and
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that has as well a knock-on effect on, uh, financial markets, including
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the, uh, the fixed income parts.
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That said, uh, I'd say it's important to keep some, uh, some perspective.
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At the time of recording, uh, the sixteenth of, uh, March, bond markets
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remain orderly and functional, even if the, uh, sentiment is
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a little bit, um, unsettled.
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Global liquidity has proven, um, resilient, a-and we are seeing that's
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reflected in both the, uh, demand and the, uh, volume of issuance, uh, getting done.
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So, um, certainly pricing has adjusted to, uh, to reflect higher macro risks
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around, uh, growth and, uh, and inflation.
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If you look at the, uh, 10-year benchmark yields, uh, actually both in the US
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and in Europe, they're up roughly thirty-five basis points, give or take.
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So that's, that said, I do… Pricing is, it's healthy.
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It's markets doing their, their, their job really.
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Uh, but and we are increasingly seeing as well probably, um,
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more, um, more selectivity, whether it's by, uh, geography, by
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sector, or rating, uh, category.
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I mean, of course, I have to say that this resilience isn't,
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uh, guaranteed, that's for sure.
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It will be tested depending on how the, uh, geopolitical situation evolves.
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Uh, but for now, I'd say that bond markets are showing composure.
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They are absorbing shocks, they are repricing risk, and they are
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continuing to, uh, to function as a, uh, critical source of, uh, financing
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This context is crucial.
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You mentioned sectors, and I wanna bring our conversation to that focus.
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Your research identifies that sector concentrations are surging amid
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strong bond issuance, particularly in tech and for AI investment.
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And since we came out with this research, we've seen risks play
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out in real time with AI-related software disruption across markets.
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Can this dynamic be considered an outlier specific to this industry,
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or is this the new status quo of credit risk and opportunities?
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Hmm.
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Um, I mean, you said the, uh, the, the context, you're right.
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Technology, uh, technology issuance, uh, last year represented about seventeen
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percent of the total of, uh, non-financial corporate issuance, so that made it
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really the, uh, the largest sector on par with, uh, utilities, which traditionally
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is the, uh, the dominant issuer.
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So tech now is very much at the core of the, uh, credit markets.
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You mentioned the, um, the, the recent AI-related, uh, wobble in
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the, uh, in, in the software sector.
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I think what's interesting there is how quickly the, uh, the narrative, um, flips.
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Uh, one month's-- Well, yeah, just a few months ago, the debate was really about,
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uh, whether AI would live up to the, uh, expectation and, uh, how much productivity
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and, uh, and automation it could deliver.
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And then suddenly the, uh, the concern shifted to whether AI could actually
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disrupt or even, uh, substitute, uh, parts of incumbent sectors,
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uh, like the, uh, software sector with, uh, therefore some, uh, some
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strong implications on our valuation.
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So is this dynamic an outlier?
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I don't think so.
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I think that first, uh, bouts of market, um, anxiety a-and sharp
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volatility are likely to recur.
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We're, we're late in the cycle.
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We're coming off of long periods of, uh, market depreciation and very, um,
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favorable funding conditions, but with increasingly narrow economic growth.
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And at the same time, we're also in a phase of, um, of material, um, structural
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disruption, not just AI, I also mean the rise in private markets and crypto.
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And I think really those, those forces are combined to create
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both opportunity and uncertainty.
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And I think for, for credit investors, it's, it's a fine line between being
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vigilant and, uh, becoming unnerved.
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And I think it also means, uh, that selectivity, uh, matters more than ever.
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Well, there's clearly more change on the horizon.
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With debt markets in this transition and in search of enhanced liquidity,
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what innovations around bond market infrastructure should market
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participants pay attention to?
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I think when we, when we talk about markets being in search of,
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um, enhanced liquidity, that, that search can really take several forms.
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One is, uh, geographical.
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I'm thinking of local bond markets trying to unlock pools of domestic
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liquidity to diversify funding sources.
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I think that's, uh, that's been gaining momentum, but will be, of
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course, tested by the current conflict.
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Another one is, um, is more structural, uh, through the
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rise in, uh, in private markets.
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And I think here the big question is, um, it's not just growth, it's, uh, what it
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would take for retail investors to safely become a, um, a systemic part of that
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ecosystem, if you think of transparency, liquidity, and, and risk management.
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And then there's the, uh, technological dimension.
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Uh, a lot of attention is focused on, uh, decentralized finance
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and the, um, the potential of, uh, blockchain, uh, technology.
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And really for that to scale meaningfully, one prerequisite is, um, i-is missing,
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and there's a piece that's still missing.
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It's really the, um, the, uh, this bridge required, uh, between DeFi,
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uh, and traditional finance, or rather the, the other way around, i.e.,
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the need for a reliable, safe, and widely accepted, um, token that can
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really bridge, uh, those both worlds.
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And whether we're talking about s- uh, central bank digital currencies,
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CBDCs or, or stable coins I think these, uh, instruments really need
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to operate seamlessly between, uh, platforms and blockchains really so
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that we have, uh, real-time exchanges without, uh, trapping liquidity.
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And I think without that, we won't see any material, uh, progress in
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secondary markets and as well in turn, that means, um, uh, limited
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scope for primary is-issuance.
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And that's actually one of the reasons why we, uh, we launched, uh, back in December
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twenty twenty-three our stablecoin stability assessment, assessing really
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the, uh, the stability, uh, or the rather the, uh, ability of a stablecoin
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to maintain a stable value relative to a, to a fiat currency to see if they
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can play this role Uh, final points.
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I think I need to mention regulations.
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I think that they, um, there has been regulatory progress in that, um, in
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that context, particularly around, uh, stable coins in the US and Europe.
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But I'd flag that, uh, policy approaches do diverge significantly,
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uh, with the US, for instance, leaning very heavily on stable coins.
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Uh, China, on the other hand, focus more on CBDCs, and then you
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have Europe somewhere in between.
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So, uh, I think there are really a lot of, uh, signals to, uh, to
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watch to understand how this evolves and, uh, and also how quickly.
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Alex, thank you so much for your incredible insight.
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Matt, I'm going to shift the focus over to you and your deep
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expertise because there's one innovation we have yet to discuss.
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A tremendous part of this innovation has come from the expansion of global
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fixed income ETFs, with their assets under management reaching three point
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two trillion as of December 6th, 2025.
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That's according to S&P Global's research.
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So Matt, my first question for you, how do these exchange traded
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funds work, and what's driving the growth of these products?
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Yeah, sure.
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So when we talk about global fixed income ETFs, we're really talking
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about taking what used to be quite a fragmented dealer-driven bond market and
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wrapping it in a single tradable share.
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So if we think about it logically, at a basic level, a bond ETF holds a
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basket of bonds that are designed to track a particular index or a defined
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strategy that might be treasuries, global corporates, high yield, or a mix of
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bonds from several different sectors.
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All of those investments are then held in a single fund, the units of which
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are tradable like a single equity.
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Now, this instrument is subsequently called an exchange
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traded fund, or an ETF for short.
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Investors can then buy or sell shares of that ETF on an exchange throughout
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the day, just like in equity.
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Uh, behind the scenes, there are financial entities called authorized participants
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who usually, um, consist of large financial institutions, uh, people who
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play that role normally, or institutions who play that role normally, uh, major
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banks, broker-dealers and specialist trading firms, and they look to create
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and redeem shares in large blocks by delivering or receiving the underlying
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bonds, and that helps keep the ETF price stay close to the value of its holdings.
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Now, that seemingly simple structure solves a lot of the practical headaches of
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owning individual bonds, sourcing lines of illiquid issues, dealing with minimum lot
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sizes or, uh, managing several different maturities or, or reinvestment strategies.
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Um, the ETF does all of that in one trade, and crucially, it does it with
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intraday pricing and transparency that you don't simply always have
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if you're phoning dealers, uh, for quotes Continually throughout the day.
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Now, the research piece that we're basing this podcast on highlights that
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bond ETFs facilitate diversified fixed income exposure without the operational
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complexities inherent in individual bond acquisitions, and that they
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enhance transparency, including, um, through intraday pricing visi-visibility
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as I've, uh, explained above.
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Now, in terms of the actual growth story, um, I think that the numbers
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really speak for themselves.
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As you just mentioned, global fixed income ETF assets under management
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reached about $3.2 trillion as of the 6th of December 2025, and that's up
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from just half a trillion in 2016.
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So we've seen more than a fivefold increase in just under a decade.
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So really, in my opinion, there are a few key drivers that sit
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behind this impressive level of growth that we're seeing.
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So the first one would be a structural cost advantage.
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So bond ETFs tend to carry lower expense ratios than many traditional active
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fixed income funds, and the ability to trade on exchange can also help
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investors manage those transaction costs.
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Our paper explicitly cites that cost ef-efficiencies, including reduced,
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uh, expense ratios relative to active management alternatives, is one of the
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core reasons, um, that adoption has accelerated over the last few years.
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Now, one trade can also give you exposure to thousands of bonds across
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different countries, sectors, and rating buckets, so access and diversification
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is another key driver of this growth.
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Um, allocations across, uh, bond ETFs have broadened across treasury
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securities for core fixed income investment-grade corporate credit and
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high-yield instruments, and they've all been supported by attractive yields and
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fees as well You could also look towards the flexibility and implementation
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because ETFs trade on an intraday basis.
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They've become tools not just for long-term alloc- as- um, allocation,
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but also for tactical moves.
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You see hedging of interest rate or c- credit exposure, and they
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also allow investors to adjust duration pretty quickly as well.
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In the market, you can see that there's also a blend of passive and active
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strategies that's now become available.
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Passive still really dominates at about eighty-two percent of the fixed
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income ETF market, but active bond ETFs are now a real genuine growth
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engine across the ETF landscape.
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Um, active AUM surged about fifty-two percent year on year to around naught
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point five nine trillion dollars, um, signaling the investor demand
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for strategic credit selection within t- ETF wrappers is a real thing
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and is a real driver of growth.
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So when you put all of that together, you've got a structure that maps very
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neatly onto what investors are actually asking for today, in my opinion at least.
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So you've got liquid, transparent, low-cost fixed income exposure that
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still allows for that nuance in how risk is taken, and perhaps more importantly
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in current market conditions, how risk is, uh, generally being managed.
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You've identified that bond ETFs clearly have structural advantages, going as
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far to say in your research that these instruments are proving their value as
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essential components of modern investment strategies, offering unprecedented access,
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efficiency, and flexibility in fixed income allocation as the market matures.
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So now I'm gonna challenge you with my next question.
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How has their development affected market effectiveness and investor accessibility?
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Yeah, sure.
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So you quoted that line from the research about bond ETFs proving their value.
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Now, in my opinion, that's not just an exaggeration, it's a
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real summary of two big impacts.
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So how the market works and really who gets to participate.
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So on market effectiveness, again, in my opinion, there are a few clear
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channels to, to look over here.
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So bond ETFs add a bit of an extra layer of liquidity, if you like.
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So bond ETFs have created this additional liquidity layer, allowing investors
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to transfer risk exposure effectively without requiring transactions
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in the underlying securities.
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That's, that's a line that comes directly from our report.
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So what that means is instead of everyone trying to trade individual bonds,
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many of which can often have variable liquidity profiles, they can transact
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in a single centralized instrument.
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Now, that tends to smooth both price discovery, and it can also help to
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keep the overall system functioning better, especially when some of the,
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uh, underlying cash, uh, cash market can on occasion be quite patchy.
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So better price discovery and transparency.
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You can also see in the-- that our paper notes that the price
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discovery function of ETFs relative to underlying bonds has enhanced
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market transparency and efficiency in the overall financial ecosystem.
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Now, in plain English, that means that because ETF shares trade continuously,
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they provide a real-time signal of where bonds of baskets are clearing, which can
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then lead to informed valuations in the over-the-counter bond market as well.
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So that kind of leads on to the next step, which is more effect- more efficient
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execution for market participants.
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So you've got the combination of lower ongoing fees and the ability to execute
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in size on exchange, and I believe that, again, in my opinion, that's
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really enhanced market efficiency, particularly when you compare that to
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building or rebalancing bespok- bespoke, uh, bond portfolios one line at a time.
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When we look at investor accessibility, the change has
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arguably been even more profound.
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Um, we talk often about democratizing the bond market, and the research is
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pretty explicit that bond ETFs have also democratized bond market access,
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uh, providing enhanced portfolio construction capabilities for both retail
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and smaller institutional investors.
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Historically, if you weren't a big institution with deeper relationships,
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getting sensible diversification in bonds was difficult and pretty expensive.
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But now, with small ticket sizes, a retail investor can own a slice
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of any, pretty much any part of the global fixed income market.
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Um, because there are ETFs covering different duration buckets, credit
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qualities, and region investors who previously could only hold a
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single bond fund, um, can now also fine-tune their fixed income profile.
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For example, they can combine a, a short duration treasury ETF with an
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ingre- uh, an investment grade credit ETF to target a specific, uh, risk
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and return mix, and that's led to more nuanced portfolio construction
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across the whole investor base.
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We're also seeing, uh, improvements in the management of liquidity mismatches.
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They're, they're being managed a lot more carefully.
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If you, uh, look in our paper again, it acknowledges concerns around
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potential liquidity differences between ETF secondary market trading
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and the underlying bond market depth, but notes that these are
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being increasingly well managed.
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Now, that evolution in how market makers, authorized participants, and regulators
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think about liquidity is, in my opinion, a bit of a sign itself, um, of the market
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becoming more mature and effective.
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So really, their development hasn't just given investors a new product,
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it's also changed how risk is transferred, how prices are formed,
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and who can realistically access, uh, institutional-grade, uh, bond exposure.
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With this context and with this deep insight, I wanna bring the
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conversation and connect it back to Alex's discussion of resilience against
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market volatility and the performance of credit markets within these dynamics.
20:39
So your research also points out that ETFs have demonstrated considerable
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resilience across market conditions, and mechanisms are evolving to
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address potential stress scenarios.
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How do you anticipate their role and performance in the
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markets to play out and evolve as geopolitical risk becomes the norm?
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So look, I think the uncomfortable reality is that geopolitics has gone from being
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something that kind of brought around the occasional shock to recently a standing
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feature on the investment landscape.
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Um, our research describes global bond markets as showing resilience despite
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heightened policy uncertainty and a more fragmented geopolitical landscape,
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but it al- it's also cautious that this resilience shouldn't be taken for granted.
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Now, against that backdrop, um, bond ETFs have a few characteristics
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that shape how they may behave.
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Um, I think that they've got, uh, proven resilience across a, a certain, uh,
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plethora of different market conditions.
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Again, our report states that ETFs have demonstrated considerable
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resilience across market conditions, um, and mechanisms are evolving to
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address potential stress scenarios.
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Now, that's partly structural through the creation and redemption process
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and the presence of multiple liquidity providers, but partly practical as well
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as the ecosystem has really learned from episodes of volatility that
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we've been through in recent years.
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We've also noticed that, uh, bond ETFs, uh, act as a bit of a conduit
22:09
for risk transfer in stress markets.
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So in a world where geopolitical events can trigger these real big sudden
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shifts in rate spreads or cross-border flows, having one single instrument
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that allows investors to rapidly adjust exposure is incredibly valuable.
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Our paper notes that the rapid growth of ETFs is adding a new layer
22:31
of liquidity, further transforming the dynamics of the bond market.
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Now, my personal expectation is that in future stress episodes, whether
22:39
that's driven by conflict, sanctions or trade tensions, we're gonna
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continue to see bond ETFs acting as the first port of call for reallig- for
22:48
reallocating, uh, fixed income risk.
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We're also seeing a greater inter-level of interaction with more digital and, uh,
22:55
with a more digital and tokenized market.
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Um, you can see the same section of the report talks about tokenization, digital
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bonds and stable coins as emerging components of market infrastructure,
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moving us towards more real-time settlement, uh, fractional ownership
23:11
and democratized access to capital.
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As these opportunities develop, bond ETFs could really start to plug into them.
23:18
For example, being used more widely as collateral or traded on
23:23
platforms with faster s- settlement.
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All of that, um, is gonna further support their role during geopolitical stress
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by reducing some of the operational frictions that would otherwise exist.
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Um, but I say all of this, of course, with a bit of a need
23:36
for cautious optimism as well.
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The authors, uh, c-collectively are all very clear.
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Innovations, including ETFs, are really starting to lay the groundwork for
23:47
greater efficiency and flexibility, but the journey, uh, is probably
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gonna remain somewhat complex and, and nonlinear, as we state.
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So in practice, I think that means that we should expect periods where
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ETF trading volumes and discounts or premiums to NAV valuations spike in
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response to geopolitical headlines.
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Um, the structures are robust, but that's not gonna make risk disappear.
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Um, I think it's just gonna make it easier to see and probably, uh, it's gonna make,
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uh, fixed income assets through bond ETFs a, a little bit easier to trade.
24:22
Matt, your forward-looking insight sets the stage for our
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final forward-looking question.
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To wrap up this insightful conversation, I'm here-- I'm eager to hear your
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respective outlooks on where these structural shifts will take us.
24:39
Looking ahead and starting with you, Alex, what do you expect to materialize
24:43
in the future to further transform the dynamics of the bond market and investing?
24:50
I mean, as you said, uh, well, I think Matt was saying that
24:53
he's a cautious optimist.
24:54
I'd, I'd say I'm probably the same, cautiously optimist, uh, optimistic
24:59
about how innovation is laying the groundwork for greater efficiency
25:04
and, uh, flexibility in bond markets.
25:06
I think as we discussed both in terms of, uh, well, at the same time in terms
25:10
of geographical shifts, structural shifts, and, uh, and also technological.
25:16
I think just for me, one, one longer term question is around trust.
25:20
I think trust is really the, uh, the underlying pillar of bond markets at
25:24
a time of material changes and time of reduced appetite for, uh, globally
25:30
coordinated policy initiatives And I think for me, a key issue is, um, is
25:36
whether markets themselves can establish governance, uh, transparency, a-and
25:42
standards needed really to sustain that trust and confidence and to support a,
25:47
um, a durable acceleration of growth.
25:50
I think for me, actually, uh, the pace of additional innovation per se
25:54
matters less than the, um, than the credibility of the, uh, standards and
25:59
frameworks that will sit around it.
26:01
Looking ahead, I'd try and link three items, uh, or three main themes from
26:06
the research that together sketch out where bond investing might be heading
26:10
in the, uh, coming months and years.
26:11
So first, of course, I'm gonna, uh, point out the continued growth
26:14
and specialization of bond ETFs.
26:16
I think the ETF footprint, as we've already said, is, is already large, and
26:20
I think that you can see the paper also suggests that both passive and active
26:24
strategies are gonna remain important.
26:26
Uh, I'd expect more granular products in the ETF space targeting more specific
26:31
sectors, factors and duration baskets.
26:33
I think we're also gonna see further growth in active bond ETFs where managers
26:38
use the wrapper but kind of lean into the credit selection kind of curve positioning
26:42
and, and securitized niches that can be offered through, um, the ETF wrapper.
26:48
Um, going back to Alex's point, I think the second digitalize-
26:52
digitalization of bond market infrastructure is gonna be important.
26:56
You can see in, in the report that it's, uh, it highlights this.
27:00
It's quite clear that digitalization is gonna be uneven, but ultimately
27:04
it's gonna cr- increase liquidity.
27:06
I think tokenized money market funds, digital bonds and regulated stable
27:10
coins are all pointed to as some of the building blocks of a system that's
27:14
gonna be able to offer real-time settlement, fractional ownership and, uh,
27:19
a more democratized access to capital.
27:22
Um, I think for bond investors that could mean perhaps shorter
27:26
settlement, uh, cycles and that would lead to a lower operational risk.
27:31
I think you're gonna see the ability to move collateral and manage, uh,
27:34
liquidity intraday far more efficiently.
27:37
And potentially you're gonna have new forms of bond exposure that sit natively
27:42
on digital ledgers but are still anchored in those more familiar credit
27:46
frameworks that we all know and love.
27:49
I think Third, there's gonna be a broader, more diversified bond ecosystem as well.
27:56
Um, our research paper talks about the development of domestic bond markets in
28:01
emerging economies, which should, um, quote, "improve and diversify corporate
28:07
access to financing and priv-provide a buffer against external volatility."
28:12
And I think that even though those markets will still, uh, need to strengthen
28:16
transparency and supervision as they grow, um, if we look at combining some
28:21
of those with the rise of private credit and the ongoing role of public credit, I
28:25
think the menu for fixed income investors is only getting wider from those more
28:30
traditional sovereign and investment-grade corporates to, uh, securitized credit,
28:35
private loans, digital bonds, and kind of pretty much everything in between.
28:39
So really, if, if we zoom out, like, uh, I suppose the question
28:44
is: Where does that leave us?
28:46
Um, I'd say that we're moving towards a bond market that's
28:50
more accessible for institutions and probably individuals alike.
28:54
Uh, more modular as well with tools like ETFs, digital instruments,
28:59
uh, private credit sleeves that can all be combined and used in very
29:03
different but also very precise ways.
29:06
And probably more dependent, um, a market that's more dependent on robust
29:12
infrastructure and data because as the system becomes more interconnected
29:15
and more digital, um, the cost of weak plumbing and data i-i-is gonna rise.
29:22
The forces shaping global credit markets are clearly profound.
29:27
Shifting bond markets are offering the promise of greater
29:29
efficiency and flexibility.
29:32
Private markets are expanding and opening new avenues for growth.
29:36
Tokenization and other innovations in the fixed-income market are
29:39
transforming how assets are created and traded, and AI is redefining how
29:43
risk is assessed and capital flows.
29:46
These developments are not incremental.
29:49
Instead, they represent a systemic shift toward an even more data-driven
29:54
and dynamic financial market ecosystem.
29:57
Our partnership with Vanguard provides deeper insight on how the rapid
30:01
expansion of exchange-traded funds, in particular, represents a new
30:05
frontier for the global bond landscape.
30:08
Jeffrey, in your research, you note that despite sounding easy, it truly requires a
30:13
sophisticated approach to capture the risk and return of an appropriate benchmark
30:19
through an index fund, and that bond index fund managers face unique challenges as
30:25
compared to their equity-focused peers.
30:29
What characteristics of the bond market create such complexities
30:33
for bond index fund managers?
30:36
That's a great question and one that we hear all the time, and it really
30:40
starts-- The complexity really starts with the fact that in the US bond
30:44
market, there are about fourteen thousand different securities in the
30:49
Barclays US Aggregate Bond Index.
30:53
Uh, many of those bonds, uh, have limited liquidity.
30:57
Uh, many of those bonds are traditionally traded on an
31:00
over-the-counter market, which means that a buyer and a seller needs to
31:04
come together and negotiate a trade.
31:07
Uh, there are cases where pricing transparency is limited, and all of
31:12
these characteristics of the bond market, uh, require a substantially,
31:16
uh, sophisticated approach, oftentimes leveraging, uh, technology and deep
31:21
teams of experts to appropriately match the characteristics and then
31:25
the returns, uh, of that benchmark.
31:28
It's a process that we would liken to, uh, really requiring
31:32
a blend of art and science.
31:35
The growth of bond index funds and ETFs are a clear indication that investors
31:41
have an increasing appreciation for the structural advantages of diversified
31:46
fixed income exposure without the operational complexities that are
31:51
inherent to individual bond acquisition.
31:55
So from your vantage point, what is the current state of play amid
31:59
uncertain and dynamic markets?
32:03
The growth of indexing in fixed income has truly been remarkable,
32:07
uh, but it did occur on a bit of a lag relative to the well-known growth
32:12
that we've seen in equity indexing.
32:14
Vanguard launched our first equity index fund, the Vanguard 500 Index, in 1976.
32:21
It wasn't until 10 years later in 1986 that we launched the industry's
32:27
first, uh, US Bond Index Fund.
32:31
And it took quite a few years for the popularity of bond
32:34
indexing to really catch up.
32:37
Uh, by 2000, there were still only, you know, less than 30
32:42
bond index funds in the universe.
32:43
But over the last 25 years, we've seen an explosion in growth.
32:48
There are now about 400 different bond index funds available.
32:51
They account for trillions of dollars in assets and roughly 40% of the
32:56
assets in fixed income funds and ETFs.
33:00
And even over the last five years, bond index funds and ETFs have accounted for
33:05
about four out of every five dollars that have gone into fixed income by investors.
33:11
And, and, and we really think there are a couple big reasons why fixed
33:14
income growth has been so strong.
33:17
One of them has to do with fixed income index, uh, funds have really
33:21
demonstrated that they're able to tightly track their benchmarks over time, and
33:26
that's been battle-tested through a few very volatile market environments.
33:30
2008, uh, 2020, and 2022,
33:35
uh, come to mind, where bond index funds really proved that they could
33:38
closely track their benchmarks even in very volatile market conditions.
33:44
Second big reason why I think, uh, fixed income investors have
33:47
grown to appreciate the benefits of bond indexing is, is the cost.
33:51
Uh, it, it is certainly an exposure now that investors can obtain in
33:55
their portfolio to obtain broadly diversified exposure to fixed income
34:01
through an index at a very low cost.
34:03
And the Vanguard Bond Index Fund, uh, you know, really leads the charge there at an
34:07
expense ratio of only three basis points.
34:10
That low cost is so important in fixed income, where your expected return
34:15
on the asset class is a little bit lower than you would expect over time
34:20
in other asset classes like equity.
34:22
So that's why it's so important to just maintain as much of that return through
34:26
a low cost for the investor as possible.
34:29
And then the third reason why I think we've seen a big growth in the, uh,
34:33
uptake of indexing in fixed income is that- It is an asset class where there
34:38
are abundant opportunities for active managers, and we're very much believers,
34:43
uh, that active can work in fixed income.
34:46
Uh, but some investors don't have access to, uh, the best talent or the best
34:51
performing active fixed income managers.
34:53
And for those who are looking to minimize cost, control their exposures in their
34:58
portfolios, uh, they now have abundant choices in a broad array of fixed income
35:03
funds, uh, and ETFs that index the market
35:07
But how are investors actually using these products?
35:12
That's a great question, and, and, and we see a few different types of investors
35:18
approach, uh, to fixed income indexing.
35:20
One, uh, very much resonates with the way that we see many investors use equity
35:26
index funds and ETFs in their portfolio.
35:29
They look for broadly diversified, uh, exposures capturing, uh, the
35:34
broad market in equities that might be s- like something through the
35:38
S&P 500 index in fixed income.
35:40
It might be through something like the Barclays US Aggregate Index, where
35:45
they're establishing a core exposure and holding it strategically, uh, to
35:49
gain exposure to fixed income over time.
35:52
Uh, another way that, that we see fixed income investors use indexing
35:57
though has really been enabled by the growth of products and the growth
36:02
of, uh, targeted, uh, sometimes more narrow exposures in fixed income.
36:08
What we know, uh, from working with investors for decades is that when they
36:12
think about fixed income, many fixed income investors, uh, have very targeted
36:17
needs, or targeted goals, or targeted time horizons, or targeted, uh, risk tolerance.
36:25
And this means that when they build fixed income portfolios, they sometimes show
36:30
a preference for shorter duration index products or longer duration index products
36:35
that might tie to their time horizon.
36:39
Other investors have a clear preference for credit quality or yield, and they
36:43
want to tailor the portfolio to meet their unique needs from a, a risk or
36:49
yield or credit quality standpoint.
36:52
And the good news for investors today is that they have hundreds of fixed
36:55
income ETFs and index funds available that can help them gain very targeted
37:01
exposure, uh, to the sectors of fixed income that are most suitable for them.
37:07
Let's move on from market dynamics to the importance of benchmarks as a measure
37:11
of performance for the bond markets.
37:15
How do managers actually align their portfolios to benchmarks like the
37:19
Bloomberg US Aggregate Bond Index?
37:23
How does this tangibly and technically work?
37:26
Sure.
37:26
Well, it all starts with having a very deep and experienced team of investors
37:32
who have, uh, really refined the approach to bond indexing over now four decades.
37:39
Uh, this is an area where we've been managing bond index funds now since
37:43
1986, so a 40-year anniversary in 2026.
37:48
Uh, it, it really requires a deep and experienced team.
37:51
We have more than 50 portfolio managers, traders, and quantitative
37:57
researchers that make up our bond indexing team, who specialize in
38:01
covering and trading, uh, various sectors of the fixed income market.
38:06
Uh, but it's not just them.
38:08
Uh, we feel like a bond indexing effort really needs to be supplemented
38:12
by, uh, very deep risk management expertise and resources, uh,
38:18
alongside a partnership with foreign exchange traders to the extent that
38:23
we are operating in global markets.
38:26
Uh, and then these resources are something that we, uh, have set up globally.
38:31
So when you're trading in global fixed income markets and indexing global
38:35
fixed income markets, it's so important to be operating in region and having
38:40
the right kind of relationships and sources of liquidity locally in European
38:45
markets, for example, or in Asia-Pacific markets, uh, where we'd also be, uh,
38:50
looking to track benchmark exposures
38:54
Your research also crystallizes that achieving tight tracking ensures
38:59
that bond index funds deliver expected market returns, which can be
39:03
especially critical when considering bonds typically act as a stabilizer
39:08
against equity market sell-offs.
39:10
This is particularly evident right now given market volatility.
39:14
That takes me to my next question.
39:17
How do bond fund managers approach risk alignment and cost management in this
39:22
pursuit of improving investor results?
39:26
Yeah.
39:26
I talked earlier about how, you know, we kinda think bond indexing
39:30
is part art, part science, and this is really the scientific part.
39:35
Uh, again, as I mentioned earlier, there are about 14,000 securities in
39:39
the Barclays US Aggregate Bond Index.
39:41
It would be impossible to go out and, and replicate that benchmark.
39:46
Uh, we have to take an optimized, uh, or sampled approach, uh, to mimicking
39:52
the exposures of the benchmark.
39:54
And to do so, uh, we consider dozens of risk factors.
39:59
We think of risk factors like credit quality and credit quality breakdowns, uh,
40:04
the maturity breakdown of the marketplace.
40:07
We think of different sectors, uh, like corporate bonds, mortgage-backed
40:11
securities, Treasury bonds, uh, and then we'll even go further and subdivide
40:17
those sectors to try to build the broadest sample possible across all
40:23
of those dozens of risk factors, uh, that, uh, help us control the tracking
40:28
error relative to the benchmark.
40:30
But there is a limit to how many bonds we really want to hold in that sample.
40:34
One of the things that our research has found is that when you get close to about
40:39
80% or more of the benchmark, you've really found that sweet spot where you've
40:44
maximized the amount of diversification that you have, uh, that helps minimize,
40:49
uh, the tracking error relative to the benchmark, while also minimizing the
40:53
cost and the transaction cost of, uh, holding and transacting in so many bonds.
41:00
Uh, so that's kinda how we think about balancing broad diversification, uh,
41:05
with the limits of where you might start to run into higher transaction costs
41:11
So with complex events becoming more status quo than outliers,
41:16
how can the very human elements and experiences of expertise and
41:21
collaboration support managers in assessing risks, controlling costs,
41:26
and taking action in their investment decisions and benchmark alignment?
41:31
Right.
41:31
This is the art side of the equation- … to complement the
41:35
science side of the equation.
41:38
Uh, if we were to spend a day, an hour, a week on the desk of our bond index team,
41:44
you'd see, uh, investment professionals that are responsible for managing
41:49
passive portfolios or index portfolios.
41:52
Uh, but what you would observe is anything but passive.
41:55
They are making many active decisions every day to anticipate,
42:00
uh, respond to, uh, market events.
42:03
Uh, and the thing about bond indexing is that, you know, we always know
42:06
where the index is today, so as cash flows, uh, emerge on a day in and day
42:12
out basis, or rebalance activity takes place on a day in or day out basis,
42:17
we're also thinking about two things.
42:19
We're thinking about where is the benchmark today, but we're also
42:22
thinking about where is the benchmark going, uh, at the end of the next
42:26
month, uh, when it rebalances.
42:28
We are mindful of, uh, new bonds that are being issued, that are
42:32
going to enter the benchmark, and thinking about how we can, in certain
42:36
cases, in a very risk managed way, proactively trade into those exposures.
42:41
We're also thinking about bonds that are being downgraded and might be
42:45
falling out of the benchmark, and what does that mean for how m- we
42:48
might want to very prudently position ourselves ahead of those downgrades.
42:54
There are also cases where lower quality bonds are upgraded and enter
42:58
the benchmark, and we can see that with a little bit of advance notice,
43:02
uh, before the end of the month.
43:03
So these, in addition to a very dynamic market and economic environment, are
43:09
all factors that our indexing team takes into consideration on an hourly
43:13
and daily basis as they think about where is the benchmark today, but
43:17
also where is the benchmark going.
43:19
To wrap up our conversation, a quote from your research report.
43:23
You state that, "For investors, choosing a bond index fund that tracks its
43:28
benchmark closely helps enable the fund to fulfill its role in a portfolio when
43:33
that matters most." Jeffrey, I'd love to give you the last word in spelling
43:37
out what this means to you and why, in Vanguard's view, this is so important.
43:44
Yeah, it really is critical.
43:47
Uh, there are so many sources of uncertainty in markets that
43:50
that really is always the case.
43:52
You know, here in, in, in, in early 2026, you know, we're thinking about the
43:57
impact of tariffs, we're thinking about some uncertainty, uh, geopolitically
44:02
stemming from the Middle East, uh, and there are certainly some, some
44:06
questions around what that means for the future of interest rates and inflation.
44:11
And for investors, our starting point is always just get
44:14
the bonds in the portfolio.
44:16
Bonds are so important as a source of diversification and ballast relative
44:21
to riskier parts of the portfolio.
44:24
And we're so excited about the growth of indexing, uh, for those investors
44:29
who really have a preference for those kind of targeted or broad-based index
44:33
exposures, uh, which, uh, increasingly are available at a low cost and have
44:38
proven through market cycles to, uh, very closely track their benchmarks.
44:44
Uh, this is- this requires a disciplined approach, it requires a very experienced
44:49
team to do that, uh, but in a dynamic environment, the right kind of disciplined
44:54
and experienced team, uh, can really uncover, uh, pockets and opportunities
44:59
of value, uh, as part of that process.
45:02
As you've heard from Alex Beery, Matt Chesham, and Jeffrey Johnson,
45:07
precision in a shifting bond landscape is paramount as market dynamics
45:12
and investor profiles evolve.
45:15
This reinforces the clear message of our joint partnership, Partner
45:19
Perspectives: The Future of Capital Markets, Unlocking Potential Ahead.
45:24
This is a moment of real transition, an inflection point, and the opportunities
45:29
ahead won't be unlocked by any single participant acting alone.
45:34
Infrastructure, policy, data, and market practice will all need to evolve, and that
45:39
evolution will be shaped by collaboration.
45:42
That's what makes this partnership between S&P Global and Vanguard so important,
45:47
bringing together complimentary expertise to offer clarity in a complex world
45:52
with insights designed not only to inform, but to help market participants
45:57
channel knowledge into action.
46:00
To learn more, read the full collection of research on spglobal.com.
46:05
I'm your host, Molly Mintz, and this is the Look Forward Podcast.
46:10
Thanks for listening