Robin Marshall
Bond issuance and creditworthiness
Struggling companies or governments often need to issue more debt to cover their outgoings. Often, these financing pressures are temporary. But there’s a tail risk if things don’t improve. And passive (index-based) investors could become overexposed to less creditworthy bond issuers at the time when their ability to service debts is waning.
Developed market government bonds have always been considered the least risky financial asset—even a risk-free asset, as far as investment textbooks go. Since the bonds are issued in local currency, default risks are extremely low. But this characterisation is less sure than it once was.
In early 2000, over 85% of the FTSE World Government Bond index (FTSE WGBI) was represented by entities with the highest (AAA) credit rating. By April 2026, 11% of the index was in AAA-rated bonds, and BBB and A ratings took up nearly 40%.
FTSE World Government Bond Index—index share by credit rating
Source: FTSE Russell, January 2000-April 2026. Past performance is not a reliable guide to future returns.
Changes in the FTSE WGBI
Part of this evolution reflects both changes in the index and shifts in credit profiles over time. The FTSE WGBI has expanded from nine markets at its inception (in 1984) to 25 in April 2026, including the addition of select emerging market sovereign bonds. Importantly, all constituents (developed and emerging) must have a minimum “investment grade” credit rating (BBB- from S&P and Baa3 from Moody’s) to stay in the index.
However, there’s been some slippage amongst credits once considered as impeccable. Several European governments were downgraded from AAA during the eurozone debt crisis of 2009-2011. The increasingly indebted Japanese and US governments lost their AAA ratings in 2001 and 2011, respectively. The UK was downgraded from AAA in 2013 and currently sits at Aa3, three notches below the top grade.
FTSE WGBI remains the market benchmark
FTSE WGBI eligibility doesn’t depend on credit ratings alone: sovereign bond issuers must pass FTSE Russell’s strict inclusion criteria before joining the index. Specifically, they must meet a market accessibility level of 2 (the highest level) under FTSE’s fixed income country classification framework. This emphasises a strong macroeconomic and regulatory environment, adequate liquidity and investability in foreign exchange and an efficient and competitive domestic bond market.
These features help ensure that the FTSE WGBI continues to build on its 40-year legacy as an unbiased representation of the major global local currency sovereign bond markets.
Market accessibility requirements for local currency government bond markets
Source: FTSE Russell, as at May 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Currency fluctuations in the FTSE WGBI
There’s another potential source of unpredictability facing those using market-weighted fixed income benchmarks—currency risk.
The FTSE WGBI measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. So the index’s issuer weightings reflect both the amount of domestic debt issued by individual countries and the value that global markets attribute to those countries’ currencies.
Other things being equal, a sharp rise in the volume of a country’s domestic currency government debt might be accompanied by a fall in the value of that currency, offsetting the overall impact on the index. However, fluctuations in foreign exchange rates do have a role in setting FTSE WGBI country shares.
For example, in early 1985, a time of unprecedented dollar strength, US Treasuries’ share in the index was over 55%. Twenty years later, US Treasuries’ FTSE WGBI index weight fell to a low of under 20%. And another two decades on, it sits at over 40% again.
Japanese government bonds’ (JGBs’) index weight is around a quarter of its 2012 high, largely reflecting recent weakness in the yen, while there’s recently been a sharp rise in the index presence of Chinese government bonds (the first tranche of Chinese government bonds was added to the FTSE WGBI in 2021).
FTSE World Government Bond Index—aggregate government bond weightings by currency of denomination
Source: FTSE Russell, January 1985-April 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Weighting by economic footprint
Weighting a government bond index by economic footprint, rather than the market value of debt in issue, could give a more stable outcome: reducing both the exposure to potential overborrowing and, potentially, to currency volatility.
The FTSE GDP-Weighted World Government Bond index series (FTSE GDP-Weighted WGBI) is constructed using countries’ economic output as the determinant of the index weight.
We source gross domestic product data from the International Monetary Fund’s (IMF’s) World Economic Outlook database, measuring GDP in purchasing power parity (PPP), rather than nominal terms. Using PPP rather than floating FX rates helps reduce the impact of currency fluctuations.
The FTSE GDP-Weighted WGBI follows its parent index (the FTSE WGBI) in terms of country selection, issue inclusion criteria, minimum issue size and rebalancing frequency.
FTSE WGBI and GDP-Weighted WGBI—methodology
Factors supporting a GDP-weighting approach
Other factors support GDP-based weighting as a fixed income index approach.
First, GDP growth and GDP size are important measures of debt capacity, so linking constituent weights to GDP should help mitigate sovereign default risk.
GDP-weighting recognises the impact of recent shifts in the structure of the global economy, particularly the faster relative economic growth rates seen in emerging markets.
Partly as a result of this economic outperformance, emerging market governments are also less indebted than their developed market counterparts: according to the IMF, the general government gross debt of emerging markets averages 77% of GDP in 2026, compared to 108% of GDP for advanced economies.
Interest rising in alternative bond index methodologies
GDP-weighting the 40-year-old FTSE WGBI is just an example of the rising interest in alternative bond index methodologies. These index variants have the attraction of protecting investors from concentration risk and mitigating the debtor bias seen in pure market-value indices. They can also help increase the weighting of faster growing economies and, in the credit space, companies with more debt service capacity.
For more on this topic, read “Getting smarter - the case for global GDP weighted sov.bond indexes strengthens”.
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