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. Though they have been generally excluded from traditional aggregate-type fixed income benchmarks in the past, high yield bonds remain a growing asset class that has historically offered yields that exceed investment grade debt (see Exhibit 1). In exchange for incremental yield are typically heightened credit and liquidity risk. In this article, we examine the components of the iBoxx USD Liquid High Yield Index (“IBOXHY”) that have demonstrated potential mitigation of liquidity risk. Contrasting other broad benchmarks to IBOXHY helps explain why liquid index construction matters, not just for the indices, but for the broader corporate bond ecosystem. We estimate the size of the ecosystem currently supported by IBOXHY to be in the hundreds of billions of U.S. dollars, and liquidity is measured as its underlying bond bid offer spreads. Because of the index design, it has been able to achieve the liquidity objective for over 15 years.
Promoting transparency with an emphasis on liquidity, the indices are constructed to serve as a basis for tradable instruments like ETFs, swaps and futures. In a follow up to this paper, we will explore the fund, derivative and securities lending markets that propagate liquidity in various forms.