What do duration, the yield curve and credit trends tell us about the evolving fixed income landscape? S&P DJI’s Anu Ganti and Ben Vörös explore the recent performance of S&P DJI’s iBoxx indices in Europe and highlight the latest innovations in the fixed income indexing toolkit.
[TRANSCRIPT]
Anu Ganti:
The first half of 2025 saw a divergence in fixed income performance in many markets for both corporate credit and government bonds, but how did this play out in Europe? And what do duration, the yield curve and credit trends tell us?
Hello, I'm Anu Ganti of S&P Dow Jones Indices, and I'm joined by my colleague, Ben Vörös, to explore the recent performance of S&P DJI's iBoxx indices in Europe, as well as unpacking new index innovations such as our fixed maturity indices.
Thanks so much for joining me today, Ben.
Ben Vörös:
It's a pleasure to be here.
Anu Ganti:
So to kick off, there are so many macro trends happening right now in 2025. Why don't you take us through some of these macro trends and the fixed income landscape, and what were some of the key trends that we saw in 2024 and so far this year?
Ben Vörös:
So, when we think about fixed income markets in the first half of 2025, we can really distinguish three main trends, or three main phenomena of interest.
The first one in the sovereign bond space is that there have been various forces pulling and pushing various regions around the world, which resulted in a significant performance differential in sovereign fixed income benchmarks around the world. At the top of the leaderboard, we've seen several Latin American indices coming out on top, namely Mexican bonds clocked up a performance of 9%, which is very strong in the fixed income space, and the Brazilian inflation-linked bonds and Peruvian government bonds also provided a high-single-digit return in the first half of 2025. At the bottom of the ledger, the S&P Japan Sovereign Bond Index dropped 3.6% as the Bank of Japan continued to pursue a policy of monetary tightening.
Turning to corporate credit, we've seen U.S. corporate credit indices outperforming both in the investment grade and the high yield space. And that outperformance over Europe came despite the fact that European credit spreads themselves did better than the U.S. ones, as duration exposure in Europe was heavily penalized, where in the U.S., there were tailwinds to taking on duration risk.
And the third interesting development we've seen is that there has been an increase in both trading volumes and open interest in futures contracts linked to the iBoxx benchmark series, and that's a sign of increased adoption by market participants in the fixed income tradable ecosystem.
Anu Ganti:
That's so interesting to see the growth in the fixed income tradable ecosystem.
And you talked about a couple of key trends here, including duration, corporate credit. These are important because there are a couple of the sources of outperformance, or alpha, for active fixed income managers that we've done a lot of research on, and also illiquidity. Why don't you take us through these three important sources and why they're so important?
Ben Vörös:
So, when we think about excess returns in the fixed income markets, we can categorize them by the three T's, which are time, trust and trading.
The first of these, which is time, refers to taking on a term or interest rate risk, and it is approximated by the relative performance of longer-dated bonds versus shorter-dated bonds.
Trust, the second of the three T's, corresponds to taking on more credit risk by tilting down the credit spectrum from sovereign bonds into investment grade and high yield bond universes.
The third of the three T's, trading, refers to getting exposure to illiquid bonds, and that is estimated by the relative performance of benchmark investment grade and high yield indices versus their liquid counterparts.
And if you look at how these three T's performed in Europe in the first half of the year, what we've seen is that two out of these three T's, namely trust and trading, have provided a tailwind to returns, but term, which is basically taking on duration risk, severely underperformed, as the whole of the Eurozone, but Germany in particular, has embarked on a massive fiscal loosening, and that resulted in increased bond issuance and, consequently, a jump in high duration yields.
Anu Ganti:
Interesting. And to see the dichotomy of U.S. versus Europe and the rest of the world is so important as investors navigate this landscape.
And speaking of the landscape, we've seen so much in the evolution of indexing within the fixed income space. Can you talk to us a little bit about some of the innovations within fixed income indexing, including our fixed maturity indices?
Ben Vörös:
So, when we think about innovation in the fixed income space, one that immediately comes to mind is fixed maturity indices. The way fixed maturity indices work is that they have a fixed maturity date, and they represent and track the performance of bonds which fall within that maturity range.
So, to be more specific, if you look at the iBoxx USD Corporates 2029 Index, for example, that index tracks the performance of investment grade bonds that mature in the year 2029. And the way these indices work is that they use the same broad diversified underlying investment grade bond universe which provides the beta of the market, but then they filter this universe to include only indices which mature in a specific year, in this case, in 2029. And what happens in the final year of a fixed maturity index is that maturing bonds are replaced by money market benchmark indices, or benchmarks, rather than corporate bonds. And by the end of the maturity year, the entire index will have been converted to an index of money market instruments, and it unwinds and matures at the end of the year.
And these fixed maturity indices are, maybe, especially useful in financial planning when the timing and the extent or amount of future cash flow needs are known in advance. And, in contrast to a single bond, which may mature in, this case, 2029, a key advantage of these fixed maturity indices is that, although they do have a fixed maturity date in the future, they still provide market participants with a diversified bond exposure rather than exposure to a single bond.
Anu Ganti:
These tools can be useful for us to keep in mind as we navigate the rest of 2025 looking to duration trends, corporate credit trends, illiquidity and the three T's as you call it.
Thank you so much, Ben, for taking the time to walk us through the dynamics within the fixed income indexing space in both the U.S. and Europe.
Ben Vörös:
Thanks very much.
Anu Ganti:
To learn more about S&P DJI's indices and the topics discussed today, please visit us at the link below.
spglobal.com/spdji/fixed-income
