European Bond Indices: The search for a true index

The introduction of the euro and the growing expectation that fixed-income investors in Europe will diversify their holdings beyond domestic government bond markets have prompted many bond-trading firms to question anew what is the best way to measure the broad European bond markets. The result: a host of new indices published in recent months, each claiming to be the best guide for investors seeking to establish or refine European bond portfolios and to seek performance away from the largely credit-risk-free government markets.

The good news is that European government bond markets themselves are increasingly easy to measure and capture. Analysts at JP Morgan cheerfully admit that followers of its Emu government bond index could replicate it with just seven bonds or futures, while incurring a tracking error of just 3.3 basis points a week. The index was introduced last March, comprising 256 separate securities with a market cap of €2...