An increase of one percentage point in interest rates could result in a 4percentt decline in the value of the Lehman Aggregate Bond index, a benchmark consisting of corporate and government bonds, according to Mark Kiesel, an executive vice president of Pimco, whose Total Return bond fund is the world's largest.
Its aim is to diversify away market risk by matching the performance of the Lehman Brothers aggregate bond index, a strategy that leads to reliable, if not spectacular, returns.
The iShares Lehman Aggregate Bond Fund is an ETF that, as its name suggests, tracks Lehman's bond index.
For example, Vanguard's Total Bond Market ETF (nyse: BND), which is designed to replicate the returns of Barclay's U.S. Aggregate Bond Index, had a total return in 2008 of 5.2%.
A long-term look, using the Lehman Brothers aggregate bond index, which covers the entire fixed-income market, and the Standard & Poor's 500-stock index, shows that the current inverse relationship between bond prices and stock prices is breaking new ground.
Most of these funds are based on indexes that own broad swaths of markets, so you need only a few funds like the iShares Lehman Aggregate Bond Fund (AGG), the Vanguard Total Stock Market Index (VTI) and the Vanguard Total World Stock Index (VT).
In the third quarter of last year, when Mr. Atteberry and Mr. Rodriguez began their rising-rate defense, the fund lost 2.92percentt while the Lehman Aggregate bond index returned 4.58percentt -- a gap of 7.5 percentage points.
The Vanguard Total Bond Market fund, which tries to match the performance of the Lehman Brothers aggregate bond index, has distributed 6 cents a share in capital gains since the start of 1994 while distributing $5.23 a share in ordinary income, said Eric Jacobson, an analyst at Morningstar.
In short, that WorldCom issued $30 billion of debt was sufficient to compel money managers to buy $30 billion of WorldCom debt as long as WorldCom held an investment-grade rating and its debt showed up in the aggregate bond indexes.
The iShares Core U.S. Aggregate Bond E.T.F., which tracks the Barclays U.S. Aggregate Index, has a trailing 12-month yield of 2.3percentt, barely ahead of the rate of inflation.
