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2023 Fixed Income Index Products Annual Report

iBoxx Asian Local Currency Indices Monthly Commentary: February 2024

iBoxx USD Asia Ex-Japan Monthly Commentary: February 2024

U.S. Equities Market Attributes February 2024

Indexing Dividends: Transparent Tools for Understanding Income Strategies

2023 Fixed Income Index Products Annual Report

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Nicholas Godec

Senior Director, Head of Fixed Income Tradables & Private Markets

S&P Dow Jones Indices

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Srichandra Masabathula

Director, Fixed Income Tradable Products

S&P Dow Jones Indices

Introduction

The year 2023 was marked by significant events that affected global financial markets, including a bear market for most of the year, geopolitical conflicts, the U.S. regional banking crisis and the UBS acquisition of Credit Suisse.  These events contributed to heightened market volatility and shifts in trading volumes across various financial instruments.  This report aims to highlight the tradeable volumes in index products linked to key S&P DJI credit indices, with a focus on exchange-traded funds (ETFs), credit default swap (CDS) Indices, standardized total return swaps (TRS) and futures.  Finally, we close with an analysis of the bid-ask spreads across these products and on the individual bonds that comprise key iBoxx indices.

Credit Spreads and Volatility

After consistent interest rate hikes in 2022 across the U.S. and European markets, 2023 started off with expectations of interest rates peaking during the year.  These expectations manifested in credit spreads tightening in the first two months of 2023, as well as a decrease in the market’s expectations of future credit volatility as indicated by the Credit VIX® indices.  However, these expectations were relatively short lived, with credit spreads spiking in March 2023 due to stress in the U.S. regional banking sector and concerns related to the potential default of Credit Suisse prior to its acquisition by UBS.

As wider repercussions of the banking sector events were avoided, credit spreads recovered and set off on a consistent path of tightening over the following few months.  Since April 2023, the market’s expectations of credit volatility across the North American and European investment grade and high yield credit markets have been on a downward trend, barring a brief period in October, which saw a rise in credit spreads and expected credit volatility.

Overall, spreads across all major credit markets ended the year tighter than when had started, driven by the U.S. Federal Reserve Bank and the European Central Bank halting interest rate hikes in the second half of 2023 and the market pricing in potential interest rate cuts in 2024.

The charts in Exhibit 1 illustrate the progression of credit spreads over the course of 2023 across global credit markets, as indicated by the relevant iTraxx/CDX index spreads and the iBoxx bond index option-adjusted spreads.  For the U.S. and European markets, the relevant Credit VIX indices indicate the market’s expectations of credit volatility over the following one-month period.

Progression of Credit Spreads over 2023 across Global Credit Markets: Exhibit 1

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iBoxx Asian Local Currency Indices Monthly Commentary: February 2024

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Kangwei Yang

Director, Fixed Income Indices

S&P Dow Jones Indices

Monthly performance, maturity, yield and duration of the iBoxx ALBI, iBoxx ABF and iBoxx SGD Indices.

Since the start of the year, the option-adjusted spreads (OAS) for investment grade U.S. corporate bonds—as represented by the iBoxx $ Corporates—were range-bound between 104 to 120 bps.  The last time bonds were trading in this range was toward the tail-end of 2021.  As a result, corporate issuers may be looking take advantage of the current lower borrowing cost environment.  However, from the perspective of the lender, they would be compensated less for the additional risk they undertake (over risk-free instruments) compared to the past two years.

As the next U.S. FOMC meeting is drawing near in March, the S&P 500® was buoyant, up 5.17% in February and closing at an all-time high, led by gains in technology and AI.  Chinese stocks—as represented by the S&P China 500 (USD)—also bounced back from losses in January and posted 9.08% in February.  At the same time, the broader S&P Pan Asia Ex-Japan LargeMidCap (USD) gained 4.22%.

While the equity markets cheered, results were mixed in global bond markets.  U.S. Treasuries—as represented by iBoxx $ Treasuries—continued accumulating losses in 2024 and declined 1.38% in February.  Asian local currency markets, however, provided some bright spots—to be discussed in the following sections.

iBoxx Asian Local Bond Index (ALBI)

iBoxx Asian Local Currency Indices: Monthly Commentary: Exhibit 1

In Asian fixed income, Asian local currency bonds—as represented by the iBoxx Asian Local Bond Index (ALBI) (USD Unhedged)—gained a marginal 0.06% in February with mixed performance in the local markets (and local currencies against the U.S. dollar).

India and Thailand, in local currency terms, were the top-performing local markets as they continued their momentum into February, posting 1.20% and 1.07%, respectively.  Both China On-and Offshore markets also recorded modest gains.  At the bottom of the pack were Singapore and South Korea, down 0.93% and 0.66%, respectively.  

For most local markets, gains or losses tended to extend across the whole term structure.  China Onshore 10+ and India 10+ stood out this month, posting 2.75% and 1.87%, respectively.  On the flipside, Hong Kong 10+ (down 2.20%) and Singapore 10+ (down 2.15%) were the worst-performing segments.

As of the end of February, the overall index yield increased marginally by 2 bps to 3.90%.  India remained the highest-yielding bond market in the index, posting 7.13%, while China Onshore (2.41%) represented the lowest-yielding market.

 

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iBoxx USD Asia Ex-Japan Monthly Commentary: February 2024

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Jessica Tan

Principal, Fixed Income Indices

S&P Dow Jones Indices

February 2024 Commentary

Global central banks continued to hold rates steady in the month of February, and it has been close to half a year since most monetary policymakers, including the European Central Bank and U.S. Federal Reserve, introduced any interest rate changes.  In Asia, central banks have been paying close attention to their currencies’ strength against the U.S. dollar when assessing their countries’ economic conditions and interest rate policies.  Most Asian currencies have depreciated against the dollar since the start of the year.

February 2024 was the second consecutive month the S&P 500® broke its all-time high, as it rallied by 5.17%.  U.S. 10-year Treasuries, as represented by the iBoxx $ Treasuries 10Y+, continued to give up their 2023 gains, retreating 2.39%.  This brings their YTD return to -4.14% and yield to 4.53%.

In China, following the fall of new home prices in January despite stimulative policy changes, the People’s Bank of China (PBoC) persisted in its efforts to revive the property market by unveiling its largest ever reduction in benchmark mortgage rate, slashing the five-year loans prime rate by 25 bps (to 3.95%).  This would reduce the cost of new residential purchases and ease repayment pressure on existing home loans.  For the month of February, Chinese-issued U.S. dollar bonds—as represented by the iBoxx USD Asia ex-Japan China—returned 0.07%, while Chinese stocks—as represented by the S&P China 500 (USD)—fell to their eight-year low before rebounding and gaining 9.08% during the month.

iBoxx USD Asia Ex-Japan Monthly Commentary: Exhibit 1

The Asian U.S. dollar bond market’s second month of the year ended with a 0.08% loss, supported by a 1.69% rise in the high yield index and a 0.35% loss in the investment grade index.  In terms of the rolling one-year returns, China Real Estate remained the worst-performing segment, at -29.80%, while China LGFVs was one of the best-performing segments, with a return of 7.03%.

Aside from the 0-1 year segment, which posted modest gains (except CCC bonds), there was a rather stark contrast in the performance of the investment grade and high yield rated bonds this month.  The investment grade bonds retreated slightly, as the AAA 10+ years segment posted the second-worst performance at -2.07%.  On the flipside, high yield bonds mostly climbed, especially the 7-10 years and 10+ years segments, returning 4.62% and 5.64%, respectively.

iBoxx USD Asia Ex-Japan Monthly Commentary: Exhibit 2

Half of the top seven largest markets by market value in the index posted negative returns.  Spreads across all seven markets narrowed, while duration shortened across all markets except for South Korea, which experienced no change.

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U.S. Equities Market Attributes February 2024

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Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

Key Highlights

Exhibit 1: Index Returns - U.S. Equities February 2024

MARKET SNAPSHOT

Neither inflation nor Fed rates nor interest costs nor gloom of consumer and government debt (nor government shutdowns—seems we have more concerns than the saying has room for) stays these markets from the swift completion of their appointed new closing highs, as delivered by the S&P 500’s eight new closing highs in February (closing the month on one of them, at 5,096.27, though the intraday high was 5,111.06), after six in January.  The Dow Jones Industrial Average has also posted closing highs—seven each in the month of February, January and December).  For February, the S&P 500 broke through and traded above 5,000 for the first time, reaching above 5,100 as well, but leaving that close to another day.  It posted its fourth month of broad gains, up 5.17% (5.34% with dividends), after January’s 1.59%, December’s 4.54% and November’s 8.92% (cumulatively 21.52%), which followed three months of losses (-8.61%).  Year-to-date, the index was up 6.84% (7.11%), as the 2023 return was up 24.23% (26.29%), making up for 2022’s 19.44% decline; the one-year return was 28.36% (30.45%).  The index was up 50.50% (60.64%) from its pre-COVID-19 Feb. 19, 2020, closing high.

All 11 S&P 500 sectors gained for February, compared with 5 for January and 10 in December (8 of 11 for 2023).  Consumer Discretionary did the best, up 8.60% for the month (up 4.74% YTD and down 7.79% from the 2021 close), and Utilities did the worst, up 0.53% (down 2.55% YTD and down 13.75% from the close of 2021).  Breadth improved (351 up and 151 down, compared with last month’s 224 up and 279 down), with YTD breadth turning positive (302 up and 201 down; for 2023, 322 issues were up and 179 down, a reversal of 2022’s 139 gainers and 363 decliners).  February posted gains for 13 of its 20 trading days (11 of 21 last month), while trading increased 4% over January and was down 3% over February 2023.

The Magnificent 7 continued, although it appears to have become more of a one-company show, with Nvidia (NVDA) gaining 28.6% for the month (up 59.8% YTD and up 441% from the close of 2022) and representing 20% of the February total return for the S&P 500 and 26% YTD.  Nvidia briefly traded above the USD 2 trillion mark, joining Microsoft (MSFT; USD 3.07 trillion) and Apple (AAPL; USD 2.64 trillion, with Nvidia at USD 1.95 trillion) as the dominating gang of three (making up 17.9% of the S&P 500; Alphabet’s two issues add up to USD 1.52 trillion and account for 3.5% of the index).  So the trillion dollar question is—how long can it go on for?  The answer may be found in the two days prior to its earnings and sales blowout release (which ended with the company posting a record USD 273 billion market gain that next day), when some took profits (-7% for two days) but got back in—because you have to be in it to win it.  The run will continue as long as the market believes superior growth will continue.

Indexing Dividends: Transparent Tools for Understanding Income Strategies

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

Investors in search of diversified performance and income amid today’s volatile market are seeing the potential benefits of dividend index strategies of different types, says Jason Ye, director of factors and thematics indices in APAC at S&P Dow Jones Indices (S&P DJI).

Given so much market uncertainty over the past few years, investor appetite for dividend-paying stocks has been a constant in this time.

This is evident by looking at the global dividends ETF market. The assets under management of dividend-related ETFs grew from around USD 100 billion to around USD 500 billion over the past decade. Within the dividend ETF market, USD 223 billion of assets were tracking the dividend indices offered by S&P DJI as of Dec. 31, 2023.

Perhaps most notable is the fact that these flows have remained despite a dip in the performance of dividend index strategies in 2023 – which has followed a bounce back in technology stocks. Regardless, high levels of investor demand are reflected in 2023 inflows to some dividends ETFs that track S&P DJI indices in the multiple billions of US dollars.

“Despite performance, we still see very strong inflows to dividend index strategies,” said Jason Ye at S&P DJI. “Investors in the US have also been buying international dividends ETFs.”

Capitalising on the US equities story

A foundation of global investor interest in US dividends is interest in US equities.

In Asia, for example, demand has come from markets like Korea and Japan, which are interested in US equities and see dividend indices as a natural choice in addition to the S&P 500®.

Asia is also driving innovation within dividend index strategies. “This has led to us adding a covered call overlay, which we created to offer extra income from selling options,” explained Ye.

In line with investor interest, investment product issuers in the region have launched several products tracking the S&P 500 Dividend Aristocrats®.

This flagship index is designed to measure the performance of S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years. It aims to reflect both capital growth and dividend income characteristics, as opposed to alternative index income strategies that may be pure yield or pure capital-appreciation oriented.

In 2023, new products were launched in both the US and Korea tracking the S&P Dividend MonarchsTM Index which measures companies within the S&P Composite 1500®4 constituents that have followed a policy of increasing dividends every year for at least 50 consecutive years.

Compared to the S&P 500 Dividend Aristocrats, the S&P Dividend Monarchs Index further elevates the dividend growth criteria to half a century. These types of companies have been commonly referred to as the “Dividend Kings” in the investment community.

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