The Passive Aggresisve Agg, Revisited

The Bloomberg Barclays U.S. Aggregate index, aka the “Agg,” is taking an aggressive stance on risk. While it seems counterintuitive to claim that a passive instrument is taking an aggressive stance on anything, that is the nature of bond indexes, by design. We believe they are fundamentally flawed in their construction. Today is a prime example. The Agg has been loading up on lower credit quality bonds at what looks to be the wrong point in the credit cycle, and it has been extending duration at some of the lowest yields in U.S. history. In other words, this passive aggressive index has turned prudence on its head.