A Year-End Analysis of USD Fixed Income Index Performance Amid Monetary Policy Shifts
Executive Summary
In 2024, the fixed income market underwent a substantial shift due to adjustments in the U.S. Federal Reserve's monetary policy. The Fed executed three rate cuts: a 50 bps reduction on September 18, lowering the target range to 4.75%-5.00%; a 25 bps cut on November 7, reducing it to 4.50%-4.75%; and another 25 bps decrease on December 18, setting the range at 4.25%-4.50%. These actions signified a crucial shift in the monetary policy cycle, affecting fixed income markets as 2024 concluded and 2025 began. Despite these reductions, yields remained elevated compared to historical averages as the year closed.
This paper examines performance, yield, duration, credit volatility and the notable increase in index-linked futures trading activity across key USD fixed income indices. Key observations include the following.
- Significant differences in modified duration across indices have led to divergent performance outcomes.
- Current yields remain well above historical averages, offering an environment for potential income opportunities.
- The recent shift in monetary policy may change the environment, potentially benefiting holders of greater-duration weight.
- Increases in trading volumes and open interest in futures tracking iBoxx® indices, highlighting greater adoption within the fixed income-tradable ecosystem.
Index Definitions
The following indices are analyzed in this paper.
- iBoxx $ Liquid Investment Grade Index (“Liquid Investment Grade Index”): Tracks the USD-denominated liquid investment grade corporate bond market.
- iBoxx $ Liquid High Yield Index (“Liquid High Yield Index”): Represents the USD-denominated liquid high yield corporate bond market.
- iBoxx $ Liquid High Yield 0-5 Index (“Low-Duration High Yield Index”): Focuses on high yield corporate bonds with maturities of 0-5 years.
- iBoxx $ Liquid Investment Grade 0-5 Index (“Low-Duration Investment Grade Index”): Focuses on investment grade corporate bonds with maturities of 0-5 years.
- iBoxx $ Liquid Emerging Markets Sovereigns & Sub-Sovereigns Index (“Emerging Markets Index”): Reflects USD-denominated sovereign and sub-sovereign bonds from emerging markets.
- iBoxx $ Overall Index (“Overall Index”): Encompasses the broad USD investment grade bond market, including sovereign, sub-sovereign, corporate and collateralized debt.
- iBoxx iShares $ High Yield Corporate Bond Index (“High Yield Corporate Index”): Designed to be a basis for USD high yield corporate bond index futures.
- iBoxx iShares $ Investment Grade Corporate Bond Index (“Investment Grade Corporate Index”): Designed to be abasis for USD investment grade corporate bond index futures.
Note: The High Yield Corporate Index and Investment Grade Corporate Index are similar to the Liquid High Yield Index and Liquid Investment Grade Index, respectively, but have slight nuances in composition and methodology.
