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Bond Index Rebalancing, Maturities, and Mid-Month Redemptions

Article Quant Q&A · Author: Nobody
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Summary

The document discusses how bond indices handle securities that mature or are redeemed between scheduled rebalances. It distinguishes indices rebalanced daily from benchmarks rebalanced monthly, noting that performance is compared with the monthly rebalanced version. Index rules commonly exclude bonds that have less than a month remaining to maturity, helping prevent scheduled maturities from distorting the basket.

Unscheduled calls and other redemptions can still occur mid-month. The described practice is to represent the redeemed bond with a cash plug until the next monthly rebalance. Index providers continue to publish daily returns and bond-level and index-level statistics during this period. The answer advises against treating changing coupon averages as a standalone problem, since duration changes, floating-rate resets, and redemptions also affect index statistics daily. Specific treatment depends on each provider’s methodology and eligibility rules.

Key ideas

  • Some providers maintain both daily and monthly rebalanced bond index versions.
  • Performance comparisons commonly use the monthly rebalanced benchmark.
  • Bond eligibility rules may exclude securities approaching maturity, while mid-month redemptions can be held as cash until rebalance.
  • Daily index statistics can change with duration, floating-rate resets, and redemptions even when weights are reset monthly.

Tags

Fixed incomePortfolio constructionRisk management
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# Rebalancing Bond Indexes


# Rebalancing Bond Indexes












I am trying to make an index for the bond market in my country, which will be modified daily. For simplicity, suppose that I only have three bonds.

Additionally, suppose that I am interested in establishing the weights of each asset by their nominal debt value, and that they will be rebalanced monthly. Suppose also that I am interested in finding the weighted average coupon payed by the securities. Finally, suppose that one of the bonds expire somewhere during this month.

So as long as no bonds expire, we will have no problems for finding this weighted average. However we encounter a problem when the bond reaches its maturity and we do not modify the vector of weights $(\alpha_1, \alpha_2, \alpha_3)$, in the sense that the average coupon will decrease. How do indexes overcome this situation?

Thanks in advance.

## Answer by Bond wiz (score 2)

https://quant.stackexchange.com/a/51242

Major indicies, like Bloomberg Barclays, publish two versions of the index. One is rebalanced daily and the other monthly.

Returns are always compared against the monthly rebalanced index. Bonds with less than a month to maturity are typically excluded due to index rules.

However, calls and other redemptions still happen mid month. These bonds are replaced with a cash plug record until the next month’s rebalance.

Even though the index is rebalanced monthly, I would not worry about shifting index level statistics mid month. You’ll have duration changing, interest rates resetting on FRNs, and redemptions happening on a daily basis. Index providers still publish daily returns and both bond and index level statistics on the monthly rebalanced benchmarks for this very reason.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.