The Great Agg Shift: How the Bond Market Quietly Transformed

Mike Cloutier:

Hi everyone. Welcome to a Bird’s Eye View of the Bond Market, the Merganser Capital Management Podcast, featuring insights from our investment professionals on the US investment grade bond market, and major economic developments. I’m Mike Cloudier, Managing Principal for Merganser, and I’ll be hosting today. We’re recording this episode on Thursday, January 22nd, 2026, and I’m joined by my good friend and colleague, Andy Smock, co-CIO and portfolio manager. Andy, thanks for being here.

Andy Smock:

Thanks, Mike.

Mike Cloutier:

For this episode, we’re going to get into the weeds and discuss the evolution of the Bloomberg US Aggregate Index, commonly referred to as the Agg. As many market participants know, this is widely considered to be the bellwether of the US bond market. What our listeners may not be aware of is the extent of changes that have occurred under the hood in this index over the last 10 years. We think this warrants attention, so we’ve dedicated an episode to walk listeners through it and share some insight.

Okay, so let’s begin with a little background. The index began in 1986 as a Lehman Aggregate. After Lehman’s collapse in 2008, it became the Barclays Capital Aggregate index. Bloomberg acquired it in 2016 and in 2021, it was rebranded to the Bloomberg US Aggregate. The index itself is massive, representing 29 trillion dollars in US investment grade debt. It includes treasuries, corporate bonds, and several different varieties of mortgage backed securities. More on this in a bit today it has around 14,000 individual issues and roughly six and quarter years of duration. Traditional fixed income portfolios are tethered to the Agg of more than 500 ETF and mutual products, tracking it as the preferred benchmark measure. Andy, you’ve been in this business a long time and a core bond manager for most of your career. Talk to our listeners about how the Agg looks today and how that’s evolved.

Andy Smock:

Yeah, I became a core portfolio manager in 2005, so it has been a little over 20 years since I’ve been trying to beat the benchmark, and it has changed quite a bit, but some things haven’t. At its most basic level, the Agg is the total market index for bonds. It includes dollar denominated, fixed rate investment grade debt, both from the US and from foreign issuers. The foreign issued debt has to be in dollars. It includes treasuries, sovereigns, even some emerging markets to the surprise of many corporate bonds and a range of securitized products. It’s also a living index, so a composition changes over time as issuance pattern shift and sub-sectors grow or shrink.

Mike Cloutier:

So are there any types of bonds that aren’t included in the Agg today, but still in your mind, represent a meaningful part of the investment grade universe?

Andy Smock:

Yes, and it’s probably one of the most hotly debated parts of the aggregate is what to include and what not to include. But some trends have been consistent over time. There are no floating rate bonds. 144A securities are excluded. There’s no non-agency RMBS, no derivatives, and then less common, but still notable given issuance profiles are CLOs and more recently certain data center related ABS deals.

Mike Cloutier:

So if you look out over the past 20 years in your tenure of doing this and managing portfolios at Merganser, what are the notable changes in your mind?

Andy Smock:

Well, there are a lot, but the three really stand out to me. One is just the market value itself. It’s expanded dramatically with debt issuance just exploding over the last 20 years. The market value has gone from approximately 8 trillion to over 40 trillion today. Treasuries have grown from 25% of the index in 2005 to nearly 45% today driven by huge government spending and debt issuance and corporate bonds. You would think they would actually decrease as a percentage given that treasury increased backdrop. But they’ve kept up with corporate bonds being a very popular source of raising capital and it’s gone from 20 to 24% over that period.

Mike Cloutier:

Yeah, that’s very interesting. So where did treasuries and corporates steal that market share from?

Andy Smock:

It came from structured products. So structured products were 40% of the index back in the day down to 26% today. And that’s not really because agency mortgages are issuing less today than before. They just have not kept up with the other sectors. CMBS and ABS are smaller parts of the Agg, so they’re not as material, but they have also declined. CMBS fell from 10% to 6%, and part of that is just because more CMBS deals are issued as 144A, a popular part of CMBS is single asset single borrower and 144A is one of the primary ways of issuing that. So they’re excluded. Another change is that the duration has lengthened from 4.7 years to 6.1 years. Over that time it’s a 30% increase in duration. Treasuries, corporates and agency mortgages have all extended and contributed to that. And then lastly, now this is more of a fun fact than actually super meaningful, but AAA securities have gone from 78% of the index, so a vast majority, to just 3%. And the reason is just that the US government got downgraded by enough agencies that they are now AA plus rated, not AAA. So that unpacks treasuries, agencies, agency mortgages, and that the remaining is just the very few corporate AAA bonds and structured products.

Mike Cloutier:

Yeah, it’s easy to lose sight of that. So given all of those changes, you decided, do you think the Agg is still a good representation of the bond market today?

Andy Smock:

It is. It accurately reflects the issue and trends. It’s pretty unbiased in that those companies that issue a lot are in the Agg as long as you meet the criteria. But it is heavily tilted toward US government and its agencies, which make up about 70% of the index within corporates. As I mentioned, the most indebted issuers are the ones that are most highly represented. So it is representative of what’s in the universe and is investible, but it’s not necessarily representative of what are the good investments out there. And that’s part of the reason why according to eVestment and really any other source, 90 plus percent of active managers have outperformed the Aggregate over the past three, five and 10 years.

Mike Cloutier:

And is there any other benchmark that investors should consider for your total bond market exposure or is this really the gold standard?

Andy Smock:

This is really it and I hesitate to call it the gold standard, but maybe it’s the only standard. There’s just nothing else. It’s not because it’s so good. It is the representation. Obviously if you’re taking a different duration profile like LDI or short duration, there are options. But as far as an all inclusive index, it’s the Aggregate. There have been others, consultants and clients, who have tried to break up the Aggregate into its sub components and hire managers to manage to each of those and try to beat mortgages and beat corporates. But those have challenges. One of the great advantages of active management is being able to rotate through sectors over time. And by taking that lever away, you’re taking away one of the primary ways that many generate alpha over time and investment committees and clients just typically can’t move as quickly as a manager can if they’re able to choose between all sectors at different times. So for Merganser, roughly 40% of our alpha comes from exploiting relative value shifts and being very agile.

Mike Cloutier:

So in thinking about this evolution and extent of the changes that you’ve been discussing, has this impacted how you’ve gone about constructing portfolios bottom up at Merganser?

Andy Smock:

Not as much as you might think. So it has on the margin certainly measuring risk and managing tracking error and other risk metrics very much depend on the composition of what’s in the benchmark and the spread volatility of those. For those managers that are indexing, it very much impacts them or even enhanced indexers. But for Merganser, where we’re comfortable within the context of the Agg risk moving meaningfully away from benchmark weights, it doesn’t really matter that much to us. If anything, it makes it a little bit easier to beat the benchmark because of the higher treasury allocation, because usually over a market cycle there are better opportunities than treasuries.

Mike Cloutier:

So to wrap up, for our listeners, I’d just like to make the comment again that the Agg isn’t static. It’s a living index. It evolves at issuance trends and shifts in the investment grade market. And as you discussed over the past 20 years, treasury exposure has roughly doubled. Structured products have declined meaningfully and duration has extended by 30% for institutional allocators with the core bond mandate. Understanding these dynamics we think is essential. And partnering with a manager who can deliver strong risk adjusted returns without being constrained by a more concentrated opportunity set, we think is key. So with that, we want to wrap up today’s discussion. The Agg will continue to evolve just as the broader fixed income landscape does, and our goal here is to help investors understand these shifts and navigate them thoughtfully. Andy, thanks so much for joining me. We look forward to having you back on our next episode. Cheers.

This presentation is for informational purposes only and should not be considered investment advice or a recommendation of any particular issuer security strategy or investment. Product opinions and estimates offered constitute our judgment and are subject to change without notice as our statements of financial market trends, which are based on current market conditions. We believe the information provided is reliable, but do not guarantee its accuracy or completeness. This podcast contains or incorporates by reference certain forward-looking statements, which are based on various assumptions, some of which are beyond our control. Actual results may differ materially past performance is no guarantee of future results.