Look inside two fixed income indices that use innovative cash/bond/futures frameworks as they seek to reduce FX volatility while preserving yield potential.
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Bringing Global Credit Index Innovation to the Brazilian Market
S&P Dow Jones Indices has launched two innovative indices for the Brazilian fixed income market: the iBoxx USD Liquid Investment Grade BRL Hedge Carry Index and iBoxx USD Liquid High Yield BRL Hedge Carry Index
Both indices use a cash/bond/futures framework that seeks to reduce FX volatility while preserving yield potential
The long bond sleeve measures the performance of liquid, USD-denominated corporate bonds. The short position in BRL/USD mini futures aims to offset the BRL FX exposure created by expressing the bond returns in BRL, leaving the hypothetical portfolio exposed to USD credit risk.
The remaining long allocation sits in theoretical cash component, which not only generates cash carry and provides cash margin for the derivatives, but it also dampens volatility from credit exposure
For example, to help manage the overall volatility of the index, the iBoxx USD Liquid Investment Grade BRL Hedge Carry Index has a70% weight to cash earning the CETIP interbank rate and 30% weight to liquid investment grade bonds through the iBoxx $ Liquid Investment Grade Index, while it applies a -30% BRL/USD futures overlay for a structural FX hedge against currency risk via the S&P/B3 BRL-USD Mini Futures Index
Similarly, the iBoxx USD Liquid High Yield BRL Hedge Carry Index has a 30% weight to cash and 70% weight to liquid high yield bonds through the iBoxx $ Liquid High Yield Index TR (BRL), while it applies a -70% BRL futures overlay for a structural FX hedge against currency risk
Both indices rebalance monthly to restore the target allocation weight of each of their index components. These indices offer a way to measure USD credit while addressing FX risk as Brazilian investors can be exposed to significant fluctuations of the Brazilian real against the U.S. dollar when investing internationally at rates which have sometimes reached 20% annually
By embedding a structural hedge, the indices have historically tended to show smoother BRL-adjusted performance that could integrate more naturally into local strategies
The indices’ high local carry has helped to enhance yield potential while reducing overall volatility
From a global perspective, these indices are rules-based tools that can help translate international credit market exposures into Brazilian market terms
Comparing the back-tested performance of the iBoxx USD Liquid Investment Grade BRL Hedge Carry Index with the iBoxx $ Liquid Investment Grade Index TR (BRL) from Jan. 31, 2014, to Jan. 31, 2025, shows that this bond/cash/futures structure often reduced volatility while maintaining competitive performance versus the credit sleeve
There were also reduced drawdowns, where hedging mitigated the sharp FX-driven losses often seen in stress periods
Built on S&P DJI’s extensive experience in fixed income benchmarks and a decade collaboration with B3, the launch of these two indices showcases the breadth of S&P DJI’s capabilities—from corporate debt to derivative and tradable products, and emerging market (EM) local currency exposure to USD EM indices
To learn more about these innovative indices at spglobal.com/spdji.