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Debt indices: "Bonds have to be alive"

Emerging market bond investors have up to now been extraordinarily ill-served by the index compilers. Only JP Morgan has made a concerted effort to provide a benchmark index to track emerging market debt, and its Emerging Market Bond Index (EMBI) and EMBI+ have as a result become the market standards.

But the shortcoming of both indices has been their reliance on Latin American debt. Because the indices were weighted according to market capitalization of bonds, and involved quite stringent liquidity tests, they ended up being virtual proxies for Latin American sovereign bonds.

The original EMBI was weighted around 89% towards Latin America, while the more recent EMBI+ was still 78% weighted towards the region's borrowers.

As such they failed to account for the ever-expanding universe of emerging market debt instruments, and acted as a deterrent for some investors looking for broad exposure to emerging market bonds.

"Speaking to managers it became clear that a broader index would have wider appeal and draw more money into the asset class," says Peter Rappoport, head of portfolio research at JP Morgan in New York.

But for JP Morgan the problem couldn't be solved simply by adding a whole new raft of countries to its existing indices in order to achieve a broader geographical mix.

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