Nelson Huang
The sovereign bond market is the largest securities market in the world. But how should we measure its performance? Which markets should we include, which currencies and which bonds?
- The FTSE WGBI was launched in 1984 and measures performance of investment-grade sovereign bonds.
- The index has grown 25 times since inception, now including bonds from 24 countries.
- China's sovereign bonds are set to overtake Japan's in the WGBI, reflecting significant market shifts.
The designers of the FTSE World Government Bond Index (WGBI) set out to answer these tricky questions four decades ago. They created a benchmark that immediately gained popularity with investors, traders, and market analysts worldwide.
Fixed income indices now lie at the core of modern finance, providing a set of financial indicators for investors, benchmarks for active portfolio managers, and a way of investing in the broader market through index trackers.
The FTSE WGBI measures the performance of fixed-rate, local currency, investment-grade sovereign bonds from over 20 countries, denominated in a variety of currencies. Here are eight less well-known but interesting facts about this classic fixed income index.
- The FTSE WGBI is turning forty
FTSE WGBI’s inception date is 31 December 1984. Coincidentally, the inception dates of the FTSE WGBI, the FTSE 100, the Russell 1000, and the Russell 2000 are also in 1984, so these benchmark brothers are all turning middle age, celebrating their 40th birthdays in 2024.
The FTSE 100, originally called the “SE 100” (Stock Exchange 100), was set up on 3rd January 1984 by the London Stock Exchange and it soon became the best-known UK stock index[1]. The Russell 1000 and the Russell 2000 indices of US large-cap and small-cap stocks were launched on 1st January 1984 by the Frank Russell company[2] (Frank Russell’s index business later became part of FTSE Russell).
Last but not least, investment bank Salomon Brothers launched the WGBI in 1986 with an inception date of 31st December 1984. The Salomon WGBI later became the Citi WGBI (after the 1998 merger between Salomon Brothers and Citigroup). In 2017, FTSE Russell took over Citi’s fixed income index business, rebranding the popular sovereign bond index as FTSE WGBI in 2018.
2. The FTSE WGBI has grown 25x in size since inception
At the end of June 2024, FTSE WGBI included sovereign bonds from 24 countries (denominated in 16 currencies) with a total par value of nearly US$30trn.
By contrast, at its inception WGBI included only 9 markets (the US, Japan, UK, France, Germany, Canada, Australia, Switzerland and the Netherlands), with a total par amount of only US$1.15trn. In other words, WGBI has grown about 25 times in nominal terms in the last 40 years, as is shown in Figure 1.
Figure 1. WGBI historical total outstanding amount (1985-2024, US$trn)
Source: FTSE Russell, monthly data from 31/12/1984-30/06/2024. Please see the end for important legal disclosures.
3. The WGBI’s average credit rating has declined
The FTSE WGBI consists of 24 government bond markets and the index rules require every constituent to be rated investment grade or above (i.e., to have a minimum rating of BBB- by S&P and Baa3 by Moody’s). Overall, government bonds are conventionally considered a relatively risk-free asset and FTSE WGBI gives you exposure to the better-quality sovereign debt markets.
Nevertheless, the index reflects an overall decline in sovereign creditworthiness since the turn of the millennium. Before 2000, WGBI was perceived as an AAA index, as Figure 2 shows. During the European sovereign debt crisis of 2009-2011, several European governments lost their AAA ratings. The increasingly indebted Japanese and US governments lost their AAA ratings from S&P in 2001 and 2011, respectively. The downgrade of these large treasury markets thus led to a lower-rated WGBI overall. As of July 2024, only 11% of the WGBI remains AAA-rated and the majority (57%) of the WGBI is now in the AA-rated sector. Does it mean WGBI isn’t as safe as it was? It’s a question the market has not reached a consensus on.
Figure 2. WGBI’s credit rating breakdown history (2000-2024)
Source: FTSE Russell, monthly data from 31/3/2000-30/06/2024. Please see the end for important legal disclosures.
4. US dollar dominance has fallen, then risen again
Since the inception date of the FTSE WGBI, the largest five currencies (the US dollar, Japanese yen, euro, British pound, and the new joiner, Chinese yuan) have accounted for 93%-95% of the entire index. Even though it contains 16 currencies, WGBI is not a diversified benchmark in terms of currency exposure, reflecting the unequal sizes of different sovereign bond markets.
Figure 3 shows that before the 1990s, the US and Japan accounted for nearly 70% of WGBI. Starting from then, European government bonds partially replaced the US Treasury market, reaching a weighting of around 30% in the early 2000s.
During the American subprime mortgage crisis, the index’s US dollar exposure hit its lowest level, only accounting for 20% of the index, with the allocation to Japanese government bonds (JGBs) and European sovereign bonds hitting 30% and 40%, respectively. After 2012, the index’s dollar weighting increased again, with the yen exposure falling in tandem.
Figure 3. WGBI’s currency breakdown history (1985-2024)
Source: FTSE Russell, monthly data from 31/12/1984-30/06/2024. Please see the end for important legal disclosures.
5. China is about to overtake Japan as WGBI’s second-largest market
Japanese government bonds (JGBs) used to account for a third of WGBI, but that weight has been shrinking since 2012. As of July 2024, JGBs’ weight is below 10%, a record low. The shrinking of JGBs’ index footprint is down to several reasons. First, the Japanese yen has depreciated by 50% against the US dollar over the last decade (see Figure 4).
Figure 4. USD/JPY Exchange Rate (2012-2024)
Source: LSEG Workspace, weekly data from 30/7/2012-15/7/2024. Please see the end for important legal disclosures.
Second, Chinese government bonds have partially replaced those of Japan in the index. As of now, 9.3% of the WGBI is in China, and it’s worth noting that China’s index weight will continue to rise because it is still in the phase-in period. Even though China is now the third-largest sovereign bond market in WGBI, with a weighting only 0.6% lower than second-place Japan, China is likely to become the second-largest sovereign market in WGBI when the 36-month phase-in of its bonds[3] concludes in October 2024 (see Figure 5).
Figure 5. The status of China’s phased inclusion in WGBI
| Base Index | Bond Type | Number of Bonds | Scale (Market Value) | Market Value% in Base Index | Phase-in Status |
|---|---|---|---|---|---|
| WGBI | Government Bond | 79 | 18 CNY trillions | 9.30% | 32/36 |
Source: FTSE Russell. Pricing as of June 30, 2024; based on July 2024 index profile. Please see the end for important legal disclosures.
Starting Nov 2021, the inclusion will progress over the ensuing 36 months such that in the profile for each month N, a fraction N/36 of the prevailing amount outstanding of each eligible bond will be included in the index.
Third, the outstanding issuance of JGBs is slightly decreasing, compared to increases in the issuance of US Treasuries and China government bonds. On the one hand, Japan’s market size in WGBI has dropped to JPY 465trn from JPY 505trn ten years ago.
On the other hand, over the decade, the index’s US Treasury holdings have doubled from USD 6trn to USD 12trn in nominal terms. And China’s outstanding debt almost quadrupled from CNY 5trn to CNY 19trn during the same period. According to the IMF, China’s government debt-to-GDP ratio hit 80% and the US reached 120% by April 2024 (see Figure 6), with both countries increasing their debt noticeably in the last 20 years.
Figure 6. General Government Debt to GDP
Source: IMF’s World Economic Outlook April 2024. Please see the end for important legal disclosures.
Because of concerns about rising debt levels, some investors are challenging the concept of a market-weighted government bond index. They think a higher allocation in more indebted markets isn’t a good strategy, so FTSE has invented several thematic WGBI indices, such as the Debt-Capacity WGBI, the Climate Risk-Adjusted WGBI, and the ESG WGBI to satisfy the investors’ risk appetite.
6. 2021-23 were the three worst-performing years in the index’s history
As a multi-currency government bond benchmark, the WGBI’s performance is driven by three major factors: the FX return of the index’s bonds (measured in the base currency), the principal return of the index’s bonds, and the income (coupon) return of those bonds.
The return from the reinvestment of cash has historically also been an element of WGBI’s total return. However, during the period of low interest rates (i.e., 2009 – 2021), the return from the reinvestment of cash was negligible, so the cash component of total return has been ignored since November 2022.[4]
It is perhaps worth revisiting this change, given that we are back to a higher interest rate environment. Over the whole period of the index’s existence, the annualized total return of WGBI is between 4.4%-5.6%, depending on whether you measure it in dollars, euro, yen or pounds (see Figure 7).
Figure 7. Annualized return of WGBI since inception
| Return* | Standard Deviation* | |
|---|---|---|
| WGBI in USD | 5.55 | 6.99 |
| WGBI in EUR | 4.44 | 6.86 |
| WGBI in JPY | 4.36 | 7.53 |
| WGBI in GBP | 5.31 | 8.67 |
Source: Factsheet | FTSE World Government Bond Index (WGBI) | June 30, 2024. Please see the end for important legal disclosures.
But things have changed over the last three to five years: WGBI has generated a negative annual return in US dollar, euro and pound terms, reflecting the rising interest rate environment worldwide (see Figure 8).
In fact, investors receiving the WGBI index’s return via tracker products have just experienced the three worst-performing years since the index’s inception.
Unhedged yen investors are an exception: they’ve received a foreign exchange gain from holding global bonds during a period when the yen has fallen sharply.
Figure 8. Cumulative return of WGBI over 1/3/5 years
| USD | EUR | JPY | GBP | |||||
|---|---|---|---|---|---|---|---|---|
| Unhedged | Hedged | Unhedged | Hedged | Unhedged | Hedged | Unhedged | Hedged | |
| YTD* | -3.96 | -0.57 | -1.01 | -1.35 | 9.58 | -3.45 | -3.15 | -0.7 |
| 1 Year | -0.63 | 2.75 | 1.15 | 0.93 | 10.59 | -3.33 | -0.06 | 2.27 |
| 2 Years | -6.92 | -2.65 | -3.73 | -4.48 | 5.34 | -6.44 | -4.12 | -3.32 |
| 5 Years | -3.20 | -0.58 | -2.02 | -2.29 | 4.88 | -3.44 | -3.07 | -1.24 |
*not annualised
Source: Factsheet | FTSE World Government Bond Index (WGBI) | June 30, 2024. Please see the end for important legal disclosures.
7. Many WGBI market yields were negative not so long ago
Maybe it’s hard to believe, but at the inception of WGBI, its weighted average yield was nearly 10%. After that, the index yield gradually dropped, reaching a record low in March 2020, just as the Covid-19 pandemic exploded.
Then, the downward trend in yields started to reverse as investors took fright over rising inflation: the US consumer price index jumped 9.1% year-on-year in June 2022. In tandem, the US Federal Reserve raised its target interest rate dramatically, hiking from 0% to 5.25% in 18 months[5].
By July 2024, WGBI’s yield had reached 3.6%, a similar level to the pre-2008 period. Looking back, it is also hard to believe during the period of 2015 and 2020, the yields of several European sovereigns and JGBs were negative because of the fear of deflation. That was not such a long time ago, though it now feels like ancient history.
Figure 9. Historical yield of G7 countries in WGBI (1985-2024)
Source: FTSE Russell, monthly data from 31/12/1984-30/06/2024. Please see the end for important legal disclosures.
8. You need more than a good credit rating to enter WGBI[6]
To be eligible for the WGBI, a local currency government bond market must satisfy more than a minimum credit rating requirement. In fact, it must meet the market size and market accessibility criteria provided in figure 10.
These criteria are assessed semi-annually each March and September as part of our FTSE Fixed Income Country Classification[7] process. Markets that no longer meet the minimum credit quality are removed from the index at the next monthly rebalancing. Announcements regarding any index inclusion changes that result from the semi-annual country classification reviews are announced shortly thereafter, along with details on implementation.
Figure 10. WGBI’s design criteria
| DESIGN CRITERIA AND CALCULATION METHODOLOGY | |
|---|---|
| Currency: | AUD, CAD, CNY*, DKK, EUR, GBP, ILS, JPY, MXN, MYR, NOK, NZD, PLN, SEK, SGD, USD |
| Minimum Maturity: | At least one year |
| Minimum Market Size: | Enrry: At least USD 50 billion, EUR 40 billion, JPY 5 trillion, Exit: Below USD 25 billion, EUR 20 billion, JPY 2.5 trillion. |
| Minimum Issue Size: | Varies by market |
| Minimum Qaulity: | Entry: A-by S&P and A3 by Moody's. Exit: Below BBB- by S&P and Baa3 by Moody's |
| Market Accessibility Level: | Minimum level of 2. For further details on calibration of Market Accessibility Levels, please see Fixed Income Country Classification | LSEG |
Source: FTSE Fixed Income Guide (lseg.com). Please see the end for important legal disclosures.
As a result of these design criteria, the index’s membership list changes periodically.
We mentioned earlier that Switzerland was one of the nine original index members. In September 2018, Switzerland was removed from the WGBI as it no longer meets the inclusion criteria due to its market size. It was not the first time Switzerland had exited WGBI: it was excluded in October 1992 and rejoined in April 1996.
Portugal left WGBI in February 2012 due to the country’s credit downgrade. However, it is returning to WGBI in November 2024[8] because it has been upgraded to A-/A3 by rating agencies.
As of the March 2024 index profile, 17 euro-denominated Portuguese government bonds (with EUR 145bn par amount outstanding) are index-eligible, representing 0.61% of the index on a market value-weighted basis. Portugal will also be included in indices that derive their membership from the FTSE WGBI.
Greece was removed from the WGBI due to its credit downgrade in July 2010. It is currently rated BBB-, which is lower than the entry rating threshold of WGBI (i.e. A-). Thus, it is still excluded from WGBI.
South Africa was included in the WGBI in October 2012 but, like Portugal and Greece, it was removed from the WGBI in May 2020 when it lost its investment-grade credit rating (its current rating is BB-/Ba2).
1. Celebrating 40 years of the FTSE 100 Index (sharepoint.com)
2. How we built a better US equity benchmark - 40 years of the Russell US Indexes (lseg.com)
3. WGBI inclusion confirms China’s arrival on global bond stage | LSEG
4. Change to the Reinvestment of Cash in the Total Return Calculation for the FTSE Fixed Income Indices. research.ftserussell.com/products/index-notices/home/getnotice/?id=2606709
5. Federal Funds Effective Rate (FEDFUNDS) | FRED | St. Louis Fed (stlouisfed.org)
6. FTSE Fixed Income Indices: history of ground rule updates (lseg.com)
7. Fixed Income Country Classification | LSEG
8. fixed-income-country-classification-march-2024-results.pdf (lseg.com)
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