Cboe Global Markets, Inc. launched trading in Cboe® iBoxx® iShares® $ High Yield Corporate Bond Index (IBHY) futures on the Cboe Futures Exchange (CFE) Monday, September 10, 2018. The new futures are designed to allow users to hedge and mitigate high yield corporate bond credit risk, and more generally allow them to efficiently allocate to the corporate bond market and implement fixed-income trading strategies.
The price of Cboe's IBHY futures is based on IHS Markit's iBoxx® iShares® $ High Yield Corporate Bond Index (IBXXIBHY). Leveraging the deep and liquid iShares® ETF marketplace, the IBXXIBHY Index is designed to measure the performance of U.S. dollar-denominated high yield corporate debt, and offers broad coverage of the liquid U.S. high yield corporate bond universe. Below are seven charts with analysis of the performance and volatility of iBoxx high yield indexes.
CHART #1 – HIGH YIELD INDEX - PRICES AND HISTORIC VOLATILITY
The price history for the IBXXIBHY Index begins at a base value of 100 on January 31, 2013, and since that date:
- The daily closing prices for the IBXXIBHY Index have ranged from a low of 95.51 in February 2016, to a high of 126. 19 in August 2018; and
- The daily closing values of the 20-trading-day historic volatility for the IBXXIBHY Index had an average value of 3.4, and have ranged from a low of 0.42 in May 2014, to a high of 12.28 in February 2016.
CHART #2 – VIX AND TYVIX INDEXES AND EXPECTED VOLATILITY
For traders and investors who are trying to gauge investor sentiment and volatility expectations in a variety of markets on an intraday or long-term basis, Cboe offers dozens of volatility indexes, including the Cboe Volatility Index® (VIX®) and the Cboe/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX). In the chart below, the daily closing prices for the TYVIX Index ranged from a low of 3.21 in December 2017, to a high of 8.62 in June 2013. As is shown in Chart #3, the IBXXIBHY Index and the TYVIX had a correlation of negative 0.36 of weekly returns since 2013. Futures and options on the VIX Index, along with the new IBHY future, can be used for portfolio management purposes.
CHART #3 – POSITIVE AND NEGATIVE CORRELATIONS
The next chart shows the correlations of weekly returns of the IHS Markit's iBoxx® iShares® $ High Yield Corporate Bond Index (IBXXIBHY) to 10 indexes and to crude oil prices. The IBXXIBHY Index had positive correlations to eight of the 10 indexes, and negative correlations to both of Cboe’s volatility indexes that are shown – the VIX Index and the TYVIX Index. I also included the IBOXHY Index because its historical time series begins in 1999, and I will use that index in the following charts that cover longer time periods. The IBOXHY and IBXXIBHY indexes have very high correlations of above 0.99.
CHART #4 – HIGH YIELD INDEX AND INTEREST RATES
The next chart compares iBoxx USD Liquid High Yield Index (IBOXHY) (left axis) to these interest rate barometers (with rates in right axis):
(1) Bloomberg Barclays U.S. Corporate High Yield Average Option-Adjusted Spread (the correlation of weekly returns to IBOXHY was negative 0.64);
(2) 10-Year US Treasury Rate, (correlation to IBOXHY was positive 0.08), and
(3) Fed Funds Target Rate (correlation to IBOXHY was negative 0.05).
If investors are concerned about the possibility of rising rates for high yield corporate bonds in the future, investors can explore the new IBHY futures for hedging potential.
CHART #5 – PRICE CHART SINCE 1999
The next chart with prices since 1999 shows that:
- In 2008 the IBOXHY Index fell 23.9%, the S&P 500 Index fell 37%, and the S&P GSCI Index dropped 46.5%; and
- In the period from January 1, 1999 through August 31, 2018, the S&P 500 Index rose 243%, the IBOXHY Index rose 175%, and the S&P GSCI rose 40%.
The new IBHY futures are designed to help investors manage volatility related to high yield corporate bonds .
CHART #6 – HIGH YIELD INDEX AND CRUDE OIL PRICES
As shown in Chart 3 above, the correlation of the IBXXIBHY Index and crude oil prices was 0.45; this correlation was not as high as the correlation of the IBXXIBHY Index to various stock indexes. In recent years a number of research reports by investment firms have explored the issue of whether a severe drop in energy prices could have a negative impact on high yield indexes.
- A 2017 report by Peritus Asset Management stated that “Much of the story in the high yield market over the last almost three years now has been energy related.…Once we started seeing oil continue to trend below the $50 price in early 2015, we started seeing the daily returns in the high yield market very tied to the daily moves in oil prices …”
- A 2017 piece at Zerohedge entitled “How Much Longer Can Junk Bonds Ignore Tumbling Oil?” cited studies by Goldman Sachs and UBS, and noted: “The health of the energy sector remains critical for corporate credit, directly accounting for 15% & 10% of US high yield and high grade debt outstanding. … 12 month WTI at or below $40 will elevate 2015-style risks for HY energy. … “
- A provocative September 1, 2018, piece in the New York Times by Bethany McLean was entitled “The Next Financial Crisis Lurks Underground - Fueled by debt and years of easy credit, America’s energy boom is on shaky footing.”
In the chart below, note that since 2006, during the times around when crude oil dropped below $35 per barrel, the high yield index also experienced drawdowns.
In addition, Chart #7 below shows that the big down months for the high yield index saw even bigger declines for crude oil.
CHART #7 – MONTHS WITH BIG MOVES FOR HIGH YIELD INDEX
The next chart shows the eight calendar months in which the IBOXHY Index had big moves, and rose or fell more than 7%. In all four months in which the IBOXHY Index fell by more than 7%, the S&P GSCI Index, the MSCI Emerging Markets Index and crude oil had even bigger losses.
The $8.8 trillion U.S. corporate bond market includes robust cash and exchange-traded fund (ETF) markets, however, there is currently no exchange-listed futures product linked to U.S. corporate bonds. Cboe IBHY futures are based on a broad-based U.S. high yield corporate bond index and are expected to bring additional liquidity and price transparency to the marketplace. The futures will allow users to hedge and mitigate high yield corporate bond credit risk, and more generally allow them to efficiently allocate to the corporate bond market and implement fixed-income trading strategies.
Cboe IBHY futures are cash-settled with a $1,000 multiplier and trade electronically on CFE during regular trading hours (8:30 a.m. to 3:15 p.m. CT). The contracts are cleared through the Options Clearing Corporation (OCC) and regulated by the Commodity Futures Trading Commission (CFTC).
To learn more, please visit the IBHY webpage at www.cboe.com/IBHY.
CBOE RMC DISCUSSIONS ON SEPTEMBER 12 AND 13
Here are some bullet-point highlights for a couple of upcoming two-person presentations at the Cboe Risk Management Conference Europe (RMC) on September 12 and 13 in Ireland:
September 12 -- The Interest Rate Volatility Environment - Can Rates Volatility be the Next "Safe-Haven"?
- What drives rates volatilities and what do long-dated and short-dated interest rate volatility measures tell you about the state of markets
- Macro, structural dislocations and trigger points
- Long vol with a positive carry: tactical vs. systematic solutions
- Equity/bond correlation instability as the Achilles heel of multi asset portfolios
- Hedging the very steep "illiquidity skew" with cross-asset volatility
Speaker: Yoshiki Obayashi, Head of Research, Applied Academics, LLC
Speaker: Kokou Agbo-Bloua, Managing Director, Global Head of Flow Strategy & Solutions, Société Générale
September 13 -- Credit and Credit Volatility
- Markets and use cases for corporate bond index futures and ETFs
- What drives credit volatility and what do credit volatility indexes tell you about the state of credit markets and spreads?
- How to properly asses credit volatility and its relationship with equity and rates volatility
Speaker: Yoshiki Obayashi, Head of Research, Applied Academics, LLC
Speaker: Brett Pybus, CFA, Managing Director, BlackRock