Bloomberg Professional Services
This article was written by David Mullen, Product Manager for Core Fixed-Income Analytics, and Fateen Sharaby, Business Manager for Index-Linked Products at Bloomberg.
Credit futures, which started trading on the Chicago Board Options Exchange in 2018, on Eurex in 2021 and on CME Group’s Chicago Board of Trade in 2024, are emerging as a powerful tool for investors seeking diversified exposure to corporate bonds. These standardized contracts on fixed-income indexes have attracted a range of participants looking for liquidity, transparency and ease of trading without the complexities of other credit products.
In the background is a changing credit-trading landscape. The rising volume of bonds traded electronically—coupled with technological advances in execution, bond pricing and relative value analytics—means that benchmark prices can update more frequently. And given the continuing trend toward passive management, ongoing liquidity challenges in the cash bond market and the widening of the cash-credit-default-swap basis during market stress, credit futures can offer investors an alternative vehicle to manage portfolio risk. (The cash-CDS basis is the difference between spreads on bonds and on CDSs, derivative contracts used to speculate on borrowers’ ability to repay debt.)
Credit futures allow asset managers and other users to increase or reduce total return exposure to credit markets. In addition, duration-hedged contracts—which combine the credit index exposure with matched short positions in US Treasury futures—enable users to lock in excess returns over Treasury benchmarks. That can let users capitalize on credit spread changes without altering the underlying asset allocation of their portfolio. Such precision reduces tracking error, ensuring that a portfolio’s performance closely mirrors its strategic benchmark—critical for passive managers who aim to replicate index returns. Moreover, credit futures offer operational advantages, including lower transaction costs, no ISDA agreements, centralized liquidity and margin offsets with highly correlated products, such as Treasury futures. These factors make credit futures an attractive option for institutional investors looking to manage large portfolios with minimal disruption to their overall strategy.
Key for adoption of these products are analytical tools for pretrade price discovery, risk management and relative value. Among the most important metrics for credit futures is fair value—the theoretical futures price equal to the underlying index level plus its cost of carry.
Use Bloomberg’s Fair Value Monitor (FAIR) function to calculate fair value for select credit futures so you can compare them to other credit products in real time. To do that, load the ticker of the futures contract and run FAIR <GO>. Tickers of supported futures are shown in the table below.
For the Bloomberg US Corporate Investment Grade Index Futures contract that trades on the CBOT, for instance, run IQBA <Index> FAIR <GO>. In FAIR, you can toggle among available indexes using the drop-down in the upper left corner of the screen.
FAIR for credit futures is divided into four sections.
At the top, the index section provides data on the underlying index: yield, option-adjusted spread and duration. Where available, it also displays the corresponding Bloomberg Tradable Tracker index, which is composed of a sample of the most liquid members of the underlying benchmark. While the benchmark index prices daily, Tradable Trackers are designed to tightly track it intraday. FAIR thus shows how much the Tradable Tracker has changed since the last index pricing in the 1D % Chg column. If you plug that value—or your own expectation of the day’s change—into the amber 1D % Chg field for the index itself, you can calculate an intraday net asset value (iNAV) for the benchmark. For more information on Tradable Trackers, type https://bburl/pDLf8 in your browser.
The next section displays up to four futures contracts, so you can track intraday performance and gauge fair value by analyzing the premium or discount (%) to the index. If you’ve made changes to the iNAV of the index, that will be reflected in calculations here and below.
The calculator section allows you to perform custom fair-value calculations to gauge the richness or cheapness of the contract, simulating the cost of a trade. You can edit the mid prices and expected funding rates of each contract to update the fair spread.
The bottom section shows one or more exchange-traded funds that track the underlying index or a similar benchmark. Key risk measures include its iNAV, premium/discount, yield, G-spread and duration. For comparison, the last price, iNAV and premium/discount of the ETF update in real time. Note: To reset values, click the Refresh button at the top of the screen.
So why is determining fair value important for institutional investors and asset managers?
Determining whether futures contracts are trading rich or cheap versus the index is fundamental when deciding whether to purchase or sell the contracts. Consider an asset manager that may need to strategically adjust its credit portfolios. In volatile markets, it might opt to use index-linked instruments instead of buying cash bonds. Credit futures can provide an attractive alternative to CDX indexes or ETFs, and credit managers need to understand the compositional, structural, risk and pricing differences of these instruments. Fair value is an additional metric that can be used when assessing which instrument to use.
In addition, credit futures present an attractive vehicle for hedging credit portfolios. An investor interested in hedging a corporate bond portfolio could do so economically by shorting a credit future without the burden of liquidating the underlying bond portfolio.
Finally, traders can identify and capture arbitrage opportunities through relative value trading of credit futures. The merits of using one index-linked “beta” product over another are driven by market dynamics, including liquidity, tracking and costs. The interconnectedness among products such as futures, ETFs, CDX and total return swaps, and their underlying indexes, has led investors to identify relative value trading opportunities. For example, the differences in market volatility between CDX and ETFs or the financing differentials between total return swaps and futures or the basis between cash bond credit spreads and CDX can offer arbitrage opportunities and profit potential. Identifying pricing discrepancies between the fair value and market price allows traders to execute arbitrage strategies, ensuring the futures price does not deviate significantly from its fair value.
As the credit market continues to evolve, the role of credit futures will likely expand. Understanding and calculating futures’ fair value ensures portfolio managers and others can make informed decisions when using them.