The global bond markets are extensive, with individual bonds all trading with their own unique terms, coupons and maturities. Individual bonds are also often illiquid or difficult to source and, therefore, not broadly available. Fixed income indices have helped standardize the bond markets, taking this largely over-the-counter (OTC) market and creating defined units. These units can be as broad as the total market or can focus on key segments like high yield or investment grade corporate bonds, mortgage-backed securities, or municipal bonds, to name a few. Indices can be further subdivided by rating band, maturity range, sector or sustainability characteristics, among plenty of other dimensions.
Fixed income tradable indices take this one step further by offering market participants strategies that may be used as the basis for tradeable products. Fixed income tradable indices underlie financial products that take a number of forms, including ETFs, standardized total return swaps, futures and credit default swap indices. These instruments have evolved to track a liquid segment of the bond markets and offer options including inherent diversification, investability and trade efficiency. These instruments also offer transparency, given that index construction methodologies are public and memberships for indices’ underlying fixed income tradable products are often public as well. Further, fixed income tradable indices enhance transparency by providing a measure of continuous pricing to the bond markets.