U.S. Corporate Bond Index futures contracts, or CME Group Credit futures, give market participants tools to navigate credit exposure as corporate debt issuance continues to expand. Potential users of CME Group Credit futures include pension/endowment funds, insurance companies, CTAs, proprietary trading firms, asset managers and mutual funds. With CME Group Credit futures, users may benefit from margin offsets with other CME-cleared products such as Treasury futures contracts and other Equity Index futures products (pending regulatory review).

Another key advantage of Corporate Bond Index futures is their use as a means of liquidity management. CME Group Credit futures offer the possibility to be used as a “liquidity sleeve” for smooth cash management for both mutual funds and ETFs.

The corporate bond market is the third-biggest fixed income market after Treasuries and mortgage-backed securities (MBS). The U.S. corporate bond market ranks among the largest in the world with its plethora of bond issuers, and U.S. corporate bonds had $40 billion in daily volume in 2023 alongside growth in ETFs and other products.

Corporate bonds are primarily priced off interest rates and the bond issuer’s creditworthiness. One or more of three U.S. agencies will assign creditworthiness to bond issuers before investors can purchase: Fitch, Moody’s and S&P. The highest rating for corporate bonds is Triple-A, or A3.

Corporate bonds can be traded individually, although liquidity can be poor, especially for off-the-run issues or lesser known issuers. Many market participants gain direct credit exposure through credit default swaps (CDS), with most of the activity taking place on the credit default swap index (CDX). CDX indices encompass both investment grade and high yield segments, offering exposure to varying risk profiles.

A segment of market participants may gain credit exposure through exchange-traded funds (ETFs) that are based on indices published by index providers. Large firms face ETF management fees but there are no annual management fees with CME Group Credit futures that offer greater efficiencies for large firms that look to gain credit exposure in their portfolios.

In fixed income markets, an inverse relationship exists between credit spreads and bond prices. As credit spreads widen, indicating an increased perception of risk, bond prices and index levels decline. Conversely, when credit spreads narrow, reflecting a reduced risk perception, bond prices and index levels rise.

This relationship is particularly relevant for High Yield (HY) bonds compared to Investment Grade (IG) bonds. High Yield bonds typically exhibit wider credit spreads, reflecting their higher risk profile. As a result, changes in risk-free interest rates have a less pronounced impact on High Yield bond prices compared to investment grade bonds. This is because the larger credit spread for High Yield bonds dominates the influence of risk-free rates on their pricing.

Understanding sensitivity to interest rates and credit spreads is important for managing risk in bond and index portfolios.

Corporate bonds are generally split into one of two categories: Investment Grade and High Yield. These designations are based on credit ratings, with higher-rated bonds belonging to the Investment Grade index and lower-rated, aka “junk,” bonds belonging to the High Yield index. 

Bloomberg's family of fixed income indices are widely used across the industry, with over $5 trillion assets under management (AUM) benchmarked to them.

Bloomberg also calculates duration-hedged indices (DHI), such as I30287US, which use returns on short Treasury futures positions across the curve to strip out interest rate risk, for those who want to trade the credit component only.

Those seeking to trade the credit component only can gain direct excess return via Duration Hedged futures (DHB) which use the Bloomberg U.S. Corporate Duration Hedged Index as their underlying index. 

Credit futures are available to trade on CME Globex and eligible for submission to clearing via CME ClearPort under the following codes Investment Grade: IQB, High Yield: HYB and Duration Hedged: DHB. CME Group futures will be settled to the underlying Bloomberg U.S. Corporate Duration Hedged Index (DHB), LUACTRUU (IG index) and LHVLTRUU (HY index).

Contract prices are quoted in index points. Contract sizes for Bloomberg U.S. Corporate Investment Grade Index futures (IQB) are 30 x Index Points. Bloomberg U.S. Corporate High Yield Very Liquid Index futures (HYB) contracts are 150 x Index Points. Finally, Bloomberg U.S. Corporate Investment Grade Duration Hedged Index futures (DHB) contracts are 500 x Index Points. 

The minimum price fluctuation for Bloomberg U.S. Corporate Investment Grade Index futures (IQB) is 1/2 of 1 Index point, 1/10 of 1 Index point for Bloomberg U.S. Corporate High Yield Very Liquid Index futures (HYB) and 1/20 of 1 Index point for Bloomberg U.S. Corporate Investment Grade Duration Hedged Index futures (DHB).