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The coronavirus pandemic has caused the most challenging market
environment for fixed income credit investors since the Global
Financial Crisis. The increase in volatility has further
accelerated the trend towards intensified use of tradable index
products to manage credit. Here we shine a light on credit index
product usage through the lens of trading volumes, specifically for
index products linked to IHS Markit indices, including ETFs, total
return swaps, futures, and credit default swap indices.
Exchange Traded Funds
The unexpected COVID-19 pandemic roiled bond markets and caused
illiquidity in bond pricing. As such, corporate bond ETFs became a
tool to gauge pricing and provided continuous liquidity for
accessing the market. In March, central banks announced stimulus
programs (SMCCF in the US and PEPP in Europe) aimed to support
financial markets. Central banks' efforts paid off, causing credit
markets to regain lost ground in the second quarter, while also
further increasing activity in fixed income ETFs, including those
linked to iBoxx indices.
North America
The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD),
linked to the iBoxx USD Liquid Investment Grade Index, reached an
all-time high of $54 billion of assets under management (AUM) in
H1. A 53% growth driven by $3.8 billion of capital gains and $15.5
billion of inflows. Net inflows were 4.1x the inflows during the
same time period last year.
In the high yield space, the iShares iBoxx $ High Yield
Corporate Bond ETF (HYG), linked to the iBoxx USD Liquid High Yield
Index, recorded an impressive first half of the year with total AUM
reaching $ 27 billion (+39% growth). YTD, the fund saw $8.6 billion
of net inflows, with assets up 51% versus the same time period last
year.
Most of the inflows shown above occurred in March on the heels
of the Fed announcement, with LQD and HYG adding $8.5 billion and
3.4 billion in the month, respectively. Investors moved into
corporate bond ETFs, injecting billions in anticipation of the Fed
stimulus program. From May 12th through June 26th, the Fed
purchased a total of $8 billion in fixed income ETFs, including
$2.3bn of LQD and $275 million of HYG.
Europe
In support of the corporate bond market, the ECB pulled out its
own crisis-fighting bazooka in the form of the EUR 750 million
Pandemic Emergency Purchase Program (PEPP). Further, during their
June policy meeting the ECB further raised the size of the program
by EUR 600 billion, reaching total potential support of EUR 1,350
billion. At the same time, the ECB is currently excluding high
yield bonds from their purchase program.
The iShares Euro Corporate Bond Large Cap UCITS ETF (IBCX),
tracking the performance of the Markit iBoxx EUR Liquid Corporates
Large Cap Index, ended the first half with the addition of $0.7
billion of assets (vs. +$0.4bn in H1 2019) to reach $4.5 billion in
AUM, which is 18% greater than at the start of the year.
The iShares Euro High Yield Corporate Bond UCITS ETF (IHYG),
which is linked to the Markit iBoxx Euro Liquid High Yield Index,
ended mid-year with $6.9 billion of AUM. Contrary to the EUR IG
space, high yield saw a 19% decrease in assets YTD (on $1 billion
of outflows).
Cboe iBoxx iShares Bond Index Futures
The Cboe iBoxx iShares $ High Yield Corporate Bond Index Futures
(IBHY), the first-of-its-kind futures to track the performance of
USD HY bonds, notched record volumes of $5.4 billion during the
second quarter of the year. $3 billion of IBHY traded in May alone,
which was by far the biggest month on record. YTD volume in IBHY is
up to $ 7.6 billion, which is more than 5.8x the volumes during the
same period last year. It's worth noting that IBHY volumes hit a
single day volume record of $395 million on May 14th, 2020.
Standardized iBoxx Total Return Swaps
iBoxx TRS traded $53.5 billion in the first half of 2020, which
is 23.15% less than the $69.6 billion traded 1H2019. IBOXHY was the
most heavily traded index, trading $24.4 billion accounting for
45.6% of all iBoxx TRS activity. USD and EUR IG were the next two
most actively traded indices, trading $8.3 and $7.6 billion,
respectively. EUR IG was the only index to see iBoxx TRS activity
increase YoY, with H1 activity in 2020 5.98% higher than the same
period of 2019.
CDS Indices
Untranched CDS Index Volumes
Total untranched CDS index volumes across all CDX and iTraxx
Europe indices were $10.6 trillion in the first half of 2020, which
was 53.74% higher than the same point last year.
Of the CDX Indices, CDX IG was by far the most liquid, trading
$4.82 trillion in H1 (+59.29% YoY). CDX HY traded $1.4 trillion
(+53.62% YoY), while CDX EM traded $223.14 billion (+7.77%
YoY).
Untranched CDS index volumes jumped in Europe as well with H1
trading volumes of $4.17 trillion (+51.2% YoY). iTraxx Europe
Crossover and iTraxx Europe Main traded $745bn (+65.7% YoY) and
$3.07tn (+59.5% YoY) in the first half, respectively.
Tranched CDS Index Volumes
Tranches on CDS indices traded $95.6 billion in the first half
of the year, a YoY increase of 44.8%. The largest tranche market
was iTraxx Europe Main, which had $47.4bn (+32.7% YoY) in H1
volumes. The next two largest tranche markets were CDX IG and CDX
HY, which traded $21.7bn (+48.49 YoY) and $18bn (+102.4% YoY),
respectively, following by iTraxx Europe Crossover, which had
$7.7bn (+20.5% YoY) traded.
CDS Index Options Volumes
$2.5 trillion of CDS index options were traded in H1, which was
a 2.5% decrease versus the first half of last year. CDX IG and HY
option volumes traded $1.2 trillion (-7.1%) and $236 billion
(-2.7%), respectively. iTraxx Europe Main traded $844 billion
(+0.97%), while iTraxx Europe Crossover grew by 44% YoY to $183
billion.
Conclusion
The use of tradable credit indices continues to expand, driven
by increased adoption by various market participants. Volumes
across products prove to be accretive, with increased liquidity
observed across credit ETFs, CDX and iTraxx and corporate bond
futures, while TRS on iBoxx indices continue to display meaningful
activity. As shown above, these instruments have proved to be the
most liquid instruments available to credit investors, and as such
offer pricing transparency and low costs of trading that benefit
investors.
Posted 06 August 2020 by Frantz Castor, Index Product Manager, Indices, IHS Markit and
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
