Enriching the fixed income ecosystem

Bloomberg’s Future of Fixed Income conference recently convened some of the world’s foremost financial innovators and fixed-income experts. The event focused on exploring the transformative changes that are reshaping this critical asset class.

In a session titled “Enriching the Fixed Income Ecosystem,” Umesh Gajria (Global Head of Index-Linked Product, Bloomberg) moderated a discussion with Ted Carey (Executive Director, Rates & OTC Products, CME Group), Theo Frelinghuysen (Executive Director, J.P. Morgan) and Pawel Mosakowski, Managing Principal, Summit Place Advisers LLC. Together, they explored the opportunities arising from an evolving fixed income landscape that is being redefined by strategies and products like hedging, tactical exposure, basket trading innovations and ETFs.

As we approach 2025, what are your expectations for the credit markets in terms of inflows, volatility, and overall trends?

The credit market saw significant inflows in 2024, with over $100 billion pouring into ETFs and mutual funds. Yet, credit spreads have remained unusually tight —CDX IG moved within just 15 basis points, and some IG cash indices hovered around 20, less than half the historical norm. Despite this, volatility was high, with markets swiftly moving from one end of the range to the other, often within days. “What stands out is the surge in market participation, as both passive and active accounts adopt new approaches fueled by a wave of innovative products,” says Frelinghuysen.

In fact, credit is experiencing a renaissance, driven by higher base rates and attractive all-in yields, as the Fed appears to have ended its rate-hike cycle. A strong economy, lower interest rates and low default rates have further enhanced credit’s appeal. “While spreads are tight, a proportion of all in yield spreads tend to be countercyclical to rates, which indicates many investors are de facto yield investors rather than spread-focused” says Mosakowski. As long as yields remain compelling and volatility in both spreads and rates stays muted, investors will continue buying, further compressing spreads and enhancing credit’s appeal.

As markets standardize, credit is seeing the introduction of relatively new concepts compared to other asset classes. How are these being received by market participants?

The credit market’s evolution over the past two decades mirrors the earlier transformation of equities, where standardization drove innovation, efficiency, and trading volumes. Credit, however, has lagged, constrained by its issuer-driven nature and fragmented system — where even bonds from the same issuer lack fungibility, akin to mismatched Lego blocks. A key step toward standardization came post-financial crisis, “when the massive bilateral default swap system had to be netted together through painful TriOptima exercises,” says Mosakowski. This shift led to the adoption of standardized CDS contracts that streamlined clearing and helped mitigate systemic risks.

ETFs and portfolio trading have further enhanced standardization, increasing liquidity and transparency by leveraging indices. While credit remains 15–20 years behind equities in this evolution, powerful new data tools are accelerating the shift by lowering costs across this data-intensive market.

How has the evolution of credit market products, from the early days of CDX to today’s offerings, shaped the landscape? What are the key trends that have emerged along the way?

CDX, the first macro credit product, has long been a cornerstone of the market but comes with limitations—such as its equal 1% weighting, earning it comparisons to the Dow Jones of credit, and a volatile cash-versus-synthetic basis that this year exceeded the entire spread range for IG bonds. ETFs addressed many of these shortcomings but face challenges like borrowing constraints and higher funding costs in rising-rate environments.

Credit futures are emerging as the next step in this evolution. For example, the recent launch of CME credit futures delivers direct access to corporate bond indexes, with contracts tied to investment-grade (LOAC true index) and high-yield bonds (Bloomberg’s liquid high-yield index). Sized at $100,000 notional with quarterly expirations, these futures also introduce a duration-hedged credit-only index for investment-grade exposure, also using Bloomberg’s index expertise.

“The pattern we’ve seen is that the launch of a new product actually increases liquidity in the old products,” notes Frelinghuysen. Credit futures are not only gaining traction but also enhancing liquidity across existing tools. More importantly, these innovations are expanding market access, bringing in sidelined investors such as CTA accounts while driving broader participation across the ecosystem.

How are futures reshaping the fixed-income landscape, and what advantages do they offer compared to OTC products?

The dynamics of the U.S. Treasury market provide a blueprint for the growth of credit markets. Treasury futures, which have grown from half the size of the cash market a decade ago to surpassing it by 15% in daily volume, highlight how standardization and innovation can drive efficiency and liquidity. Credit futures are following a similar path, addressing gaps left by products like CDX, TRS, and fixed-income ETFs. By removing barriers such as ISDA agreements, these instruments improve market access. “As previously constrained investors become early adopters, credit futures are poised to become an essential part of the fixed-income landscape,” says Carey.

Who are the typical first movers in these markets and how might the sequence of adoption unfold?

High-volume liquidity providers—integrated bank and non-bank dealers leveraging credit indices, futures, and ETFs—lead the adoption of new credit products, in their quest for more efficiency, higher margins, and reduced risk. Large asset managers, focused on streamlining execution for portfolio ramp-ups or liquidations, are close behind. Meanwhile, real-money investors, traditionally slower to adapt, are increasingly using these tools. “Index-based products are proving effective for managing not just broad market risk but also default risk,” says Mosakowski. “By facilitating binary default risk diffusion through portfolios, these tools are reshaping risk-return dynamics.”

A decade ago, it was rare for bank desks to actively manage a range of credit instruments, from futures to tranches. Now, credit futures offer a streamlined format, mirroring risks in existing instruments but with greater accessibility and efficiency. On-screen liquidity has grown, with accounts using tools like Ibox TRS and swaps to transfer liquidity into tighter-priced futures. “Flexibility, combined with tools like VWAP for timing entries and exchange-for-physical strategies, is driving risk management innovations,” says Frelinghuysen.

Meanwhile, some OMS/EMS platforms are still integrating necessary risk metrics—an area where Bloomberg has been active. Beyond product designs, margin efficiency is a key attraction. “For instance, long IG futures paired with short 10-year Treasury futures qualify for a 75% margin credit, creating cost savings that also benefit algorithmic market makers through spread trading between corporate and Treasury futures” says Carey.

What are the expected developments in fixed income markets that could mirror the evolution of equities and accelerate this shift?

For asset managers, credit futures appeal due to their seamless integration with existing infrastructure—most firms already have futures accounts and use them for hedging. This ease of adoption points to a gradual shift away from reliance on trading individual bonds.

Meanwhile, ETFs and index products are evolving beyond their retail roots, which often render them blunt instruments despite widespread institutional use. The trend is toward developing institutional-grade tools, enabling more precise risk management. A dashboard approach to portfolio construction could further streamline this process by helping participants assess directional risk, define characteristics like rating and tenor, and evaluate execution options across various instruments.