Part 2: Derivatives and Lending Markets
The iBoxx USD Liquid High Yield Index has served as the leading benchmark for the high yield market since its debut in 2006. Designed to track the most liquid instruments in the high yield market, the index supports a broad trading ecosystem via ETFs and derivatives. In Part 1, “Income in Indexing: How the iBoxx Liquidity Ecosystem Impacts Credit Markets,” we highlighted the growth of the high yield bond market and the index construction attributes that contribute to the iBoxx USD Liquid High Yield Index liquidity ecosystem. We measured the effectiveness of the index methodology in current markets through bond liquidity analysis. In Part 2 of this paper, we continue to analyze liquidity in different forms by exploring the fund, derivative and securities lending markets that propagate liquidity in various forms.
The iBoxx Liquidity Ecosystem
The iBoxx indices act as a central hub to a diverse and active tradable ecosystem, spanning active funds, ETFs, total return swaps and futures. Other instrument types, such as credit default swap indices, are complemented by the iBoxx ecosystem, which has also expanded to include ETF options, securities lending and portfolio trading as derivatives tracking the index have become more liquid.
ETFs have been used to access high yield markets since the first ETF tracking the iBoxx USD Liquid High Yield Index launched in 2007. Beyond ETFs, total return swaps on the iBoxx USD Liquid High Yield Index are often used to express short positions, or to hedge a long position. In 2021, iBoxx Standardized Total Return Swaps and futures volumes linked to the iBoxx USD Liquid High Yield Index were USD 57.3 billion and USD 40.6 billion, respectively. Given the USD 21.4 billion in ETF AUM tracking the iBoxx USD Liquid High Yield Index at year-end 2021, derivative trading volume (iBoxx TRS and iBoxx Futures)-to-ETF AUM was 4.6x. Lastly, holders of funds tracking the iBoxx USD Liquid High Yield Index are seeing increased demand for their shares in the securities lending market.