Marketweight Definition

What is market weight?

Market weight refers to the value rating assigned to a fixed income instrument if it is credit spread meets market expectations.

Key points to remember

  • Market weight refers to the value rating assigned to a fixed income instrument if its credit spread is in line with market expectations.
  • The market weight ranking system gives a subjective estimate of the current credit spread accuracy of a fixed income instrument which can then be used by an investor to determine whether that instrument is an attractive investment.
  • Three main classifications are used to value fixed income instruments: market weight, overweight and underweight.

Understand the weight of the market

The market weight ranking system gives a subjective estimate of the accuracy of a fixed income instrument’s current credit spread which can then be used by an investor to determine whether that instrument is an attractive investment. The system includes three ranks – market weight, Overweight and underweight. The weight rating indicates that an instrument’s current credit spread is in line with market expectations. Essentially, a fixed income security deemed to be market weighted is expected to offer a credit spread at or near the market consensus.

Just as stocks can have a buy, sell, or hold recommendation, this credit rating system will rate a debt instrument as overweight, underweight, or market weighted. Having a market weight is equivalent to having a holding rating, while being overweight or underweight is equivalent to buy and sell stocks respectively. Analysts will determine if the current credit spread is an appropriate measure of risk for the investment and issue a recommendation accordingly.

Like equity securities, fixed income instruments are separated into several categories. These factors include, among others, credit risk (or credit rating), geography, industry, yieldand maturity. Fixed income securities add another layer of consideration for contingencies, such as call options and convertibility, which could further impact portfolio weighting decisions.

Fixed income instruments such as investment grade bonds can be described as being held at market weight, meaning that a portfolio is neither overweight nor underweight (allocated to) investment grade bonds relative to to a common benchmark. When a portfolio manager has a particular view, such as a bullish position in industrial bonds, a portfolio can be tilted relative to market consensus by overweighting the portfolio to an overweight position in industrial bonds.