As we approach 2025, what are your expectations for credit markets in terms of inflows, volatility, and overall trends?
Credit markets saw significant inflows in 2024, with more than $100 billion flowing into ETFs and mutual funds. However, credit spreads remain unusually narrow, with CDX IG hovering within just 15 basis points and some IG cash indexes hovering around 20, less than half their historical norms. Nevertheless, volatility was high, with markets moving quickly from one end of the range to the other, often within days. “What stands out is the proliferation of market participants, as both passive and active accounts adopt new approaches, spurred by a wave of innovative products,” says Frelinghuysen.
Indeed, just as the Fed appears to be coming out of its rate hike cycle, rising benchmark rates and attractive all-in yields are reviving confidence. A strong economy, low interest rates and low default rates make credit even more attractive. “Although spreads are narrow, their share of the total yield spread tends to be countercyclical to interest rates, indicating that many investors are effectively yield investors rather than spread-oriented.” says Sakowski. As long as yields remain attractive and both spread and interest rate volatility are contained, investors will continue to buy, further compressing spreads and making credit more attractive.
As markets standardize, credit introduces relatively new concepts compared to other asset classes. How are these being received by market participants?
The evolution of credit markets over the past two decades mirrors the earlier transformation of equities, where standardization fostered innovation, efficiency, and trading volume. But credit has lagged, constrained by its issuer-driven nature and fragmented system, where bonds, even from the same issuer, lack fungibility and resemble mismatched Lego blocks. Masu. An important step toward standardization came after the financial crisis, when “large bilateral default swap systems had to be networked through the painful Trioptima exercise,” Sakowski said. says. This change streamlined clearing and adopted standardized CDS contracts to help reduce systemic risk.
ETF and portfolio trading is becoming more standardized and leveraging indexes to increase liquidity and transparency. While credit remains 15 to 20 years behind equities in this evolution, powerful new data tools are accelerating this shift by reducing the overall cost of this data-intensive market.
From CDX’s early days to today’s products, how has the evolution of credit market products shaped the landscape? What are the key trends that have emerged along the way?
CDX, the first macro credit product, has long been a cornerstone of the market, but its equal 1% weighting has led to it being compared to the Dow Jones of credit, and its volatile cash and synthetic bases. There are restrictions such as. The year exceeded the entire IG bond spread range. ETFs address many of these shortcomings, but face challenges such as borrowing constraints and higher funding costs in a rising interest rate environment.
The next step in this evolution is the emergence of credit futures. For example, the recently launched CME Credit Futures now provides direct access to corporate bond indexes with contracts tied to investment-grade bonds (LOAC True Index) and high-yield bonds (Bloomberg Liquidity High-Yield Index). These futures have a notional size of $100,000 expiring quarterly and also introduce duration-hedged credit-only indexes for investment-grade exposure, leveraging Bloomberg’s index expertise.
“The pattern we’ve seen is that new product launches actually increase the liquidity of older products,” Frelinghuysen points out. Not only are credit futures gaining momentum, but they are also strengthening liquidity across existing tools. More importantly, these innovations are expanding market access and bringing in onlooker investors such as CTA accounts, while fostering broader participation across the ecosystem.
How are futures reshaping the fixed income landscape, and what advantages do they have compared to over-the-counter products?
The dynamics of the U.S. Treasury market provide a blueprint for credit market growth. The growth of Treasury futures trading from half the size of the spot market a decade ago to 15% more than the spot market in daily trading volume highlights how standardization and innovation can drive efficiency and liquidity. I’m doing it. Credit futures are following a similar path, addressing the gap left by products such as CDX, TRS, and bond ETFs. These instruments improve market access by removing barriers such as ISDA agreements. “Credit futures are about to become an important part of the fixed income market as previously constrained investors move in early,” Carey says.
Who are the typical first movers in these markets, and how will the order of adoption unfold?
Large liquidity providers (integrated bank and non-bank dealers leveraging credit indices, futures, and ETFs) are leading the way in introducing new credit products in pursuit of greater efficiency, higher margins, and reduced risk. Masu. Large asset managers focused on portfolio growth and streamlining execution for liquidation are falling short. Meanwhile, real money investors, who have traditionally been slow to adapt, are increasingly using these tools. “Index-based products have proven effective in managing broad market risk as well as default risk,” Sakowski says. “These tools are reshaping the dynamics of risk and return by facilitating the diversification of binary default risk across portfolios.”
Ten years ago, bank tellers rarely actively managed credit products ranging from futures to tranches. Credit futures now offer a streamlined format that reflects the risks of existing products while increasing accessibility and efficiency. On-screen liquidity is increasing, and accounts are using tools like Ibox TRS and swaps to move liquidity into hard-priced futures. “Flexibility, combined with tools like VWAP for entry timing and spot trading strategies, is driving innovation in risk management,” says Frelinghuysen.
On the other hand, some OMS/EMS platforms still integrate the necessary risk metrics, an area that Bloomberg is actively working on. Beyond product design, profit efficiency is also a key attraction. “For example, combining long IG futures with short 10-year Treasury futures provides a 75% margin credit, which provides cost savings and also benefits algorithmic market makers through spread trading between corporate and Treasury futures. It’s profitable,” Carey said.
What developments do you foresee in the fixed income market that mirror the evolution of equities and may accelerate this change?
For asset managers, credit futures are attractive because of their seamless integration with existing infrastructure. Most companies already have futures accounts and use them for hedging. This ease of implementation represents a gradual shift away from reliance on trading individual bonds.
ETFs and index products, on the other hand, have evolved beyond their retail roots and, despite being widely used by institutional investors, often end up being blunt instruments. The trend is toward the development of institutional-level tools that enable more precise risk management. A dashboard approach to portfolio construction further streamlines this process by allowing participants to assess directional risk, define characteristics such as rating and tenor, and evaluate execution options across a variety of instruments. Possibly.
