By the Financial Times (Financial TimesBond markets may be twitchy at the prospect of a deluge of refinancing by Spain, Portugal and Italy this week, but at least southern European finance ministers can rely on managers of indexed funds to absorb much of the supply of new sovereign debt. An important question for the rest of us is whether passive bond investment that seeks to replicate index returns might have wider malign consequences. The short answer is yes. The disadvantages of passive investment strategies were at their most obvious in the high-tech boom of the late 1990s. Since the weight of securities in an index is dictated by market capitalisation, there is a tendency for passive managers to invest more in shares that are becoming overvalued. In effect, the rules of the game demand that if shares have gone up, so increasing their weight in the index, the managers have to buy more. By the same token, when shares have gone down, causing shrinkage in market capitalisation weight, they have to sell them. This amounts to a value-destroying injunction to buy high and sell low. In the dotcom era, it put significantly more puff into the stock market bubble and ensured a more painful time for all when the bubble eventually burst. In the bond market, the impact of indexed investing is arguably more damaging. One reason is that it makes life easier for the most heavily indebted borrowers. Advanced country sovereign debt is by far the biggest chunk of global fixed interest indices. As Ramin Toloui of the big Pimco bond fund manager notes, such market capitalisation weighted indices are poised to increase this concentration further, especially in countries where debt is growing most. In other words, some of the least creditworthy borrowers in the system will enjoy ready access to funds regardless. Note, too, that a much greater proportion of bond market money is indexed or closet-indexed - that is, supposedly active managers hug the index to minimise the risk of underperformance - than in the equity market. Given the size of the sovereign debt market, it seems probable that global and regional imbalances such as those fostered by the malfunctioning of the monetary union will have been exacerbated by this perverse investment behaviour.