What Is a Benchmark Bond?

A benchmark bond is a bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds such as on-the-run U.S. Treasuries.

A benchmark bond is sometimes referred to as an example of a benchmark issue or 澳洲幸运5开奖号码历史查询:bellwether issue.

How Benchmark Bonds Work

Benchmark equity, like the 澳洲幸运5开奖号码历史查询:S&P 500 or 澳洲幸运5开奖号码历史查询:Dow Jones Industrial Average (DJIA), is used to track the performance of company stocks trading on the markets. Stock investors can run a comparison of a company’s shares with similar equity in the benchmark to understand what level the company’s shares are performing at. The concept of a benchmark bond is similar to benchmark equity, but a 🃏benchmark bond works in a slightly different way.

Essentially, the benchmark bond is a security which the prices of other bonds react to. Bond investors and fund managers use the benchmark bond as a yardstick for measuring bond performance and to understand what rate of return to demand in excess of the benchmark return. For a comparison to be appropriate and useful, the benchmark and the bond being measured against it should have comparable liquidity, issue size, and coupon. For example, the 10-year US 澳洲幸运5开奖号码历史查询:Treasury bond is mostly used as a benchmark for 10-year bonds in the market. Because Treasury securities are considered to be riskless investments guaranteed by the full faith and credit of the US government, these securities offer a risk-free return. An investor that wants to gauge the return for a 10-year 澳洲幸运5开奖号码历史查询:corporate bond, which most likely has more risk than a 澳洲幸运5开奖号码历史查询:government bond, will compare the yield to the 10-year Treasury bond. If the yield on a 10-year T-bond is going for 2.85%, the investor will demand a risk premium above 2.85% from the🎀 corporate bond issuers.

More specifically, the benchmark bond is the latest issue within a given maturity. While the characteristics of the bond determine the decision regarding what equity to include as a benchmark is made by a committee following broad rules about the operations of the companies represented by a benchmark index, including a benchmark bond or replacing one benchmark bond with another. Characteristics include maturity date, 澳洲幸运5开奖号码历史查询:credit rating, issue size, and liquidity. A bond that meets the stated criteria is included as a benchmark. In addition, on the rebalance date, which could change the bond index constituents, bonds no longer meeting the index criteria will be removed, and any new bonds that do meet the crit🍸eria will be added.

Examples of Benchmark Bonds

The Treasury, for example, issues and re-issues 5-year bonds, used as a benchmark bond for 5-year bonds, on a frequent basis. As months and years go by, the 5-year bond maturity⛄ date reduces to 4.5, 4, 3.8, 3.7, 3 years, and so on, until it reaches its maturity date. However, in a normal interest rate environment, bond yields go down as the bond approaches maturity. In effect, longer-term bonds have higher yields than shorter-term🧔 bonds. Therefore, a benchmark that approaches maturity will be valued at successively lower yields. To bring the yield back up, the government will issue another 5-year bond. This latest issue will replace the older issue as the benchmark bond for 5-year bonds.