Cboe and S&P launch ‘credit Vix’ indices as higher rates squeeze corporates

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Volatility indices linked to US and European corporate bonds will debut next week as highly indebted companies and their lenders attempt to navigate an environment of drastically higher interest rates.

The four “credit Vix” indices, which have been developed by exchange operator Cboe Global Markets and benchmark provider S&P Dow Jones indices, will track volatility expectations over the following month in US and European investment-grade and high-yield markets. 

The launch is an attempt to replicate the success of the original Vix index, which has helped revolutionise equity investing since its inception 30 years ago and which has become ubiquitous as “Wall Street’s fear gauge” for stocks. Trading volumes in options tied to the index are on track to hit a record high this year.

Dennis O’Callahan, Cboe vice-president of product development, said he expected the new indices to become “strong indicators” for investors, adding that testing showed a strong negative correlation between the new indices and credit prices.

“It captures credit crises with a lot more intensity than [the original] Vix index that is not designed to capture credit markets crises as such,” he said. “These indices are going to be a very strong signal for hedging.”

The rollout comes at a critical juncture for global credit markets, with investors searching for clues about the impact of aggressive interest rate rises on highly-levered corporate balance sheets. 

As the Federal Reserve and other central banks have turned the screws on monetary policy over the past 18 months, investor worries have intensified that lowly-rated companies with large debt piles will struggle under the strain of higher borrowing costs, pushing some towards unconventional methods of refinancing and others towards defaults and bankruptcy. 

That uncertainty has been reflected in the new indices. Based on testing against historical data, the average level of the high-yield Vix since the start of 2022 has been about 60 per cent higher than its average in the years before the coronavirus pandemic.

Frans Scheepers, head of US fixed income index products at S&P Dow Jones Indices, said there had been strong demand from investors for more information on credit volatility, and said the index would be particularly useful at times like this year when credit and equity markets have behaved differently.

“Credit and equity markets are not always correlated, so having a measure of volatility that is [specifically] relevant to credit for additional colour and information that the market can use to manage credit risk — that’s why we’re seeing this demand.”

Next week’s launches are the latest in a string of new indices developed by Cboe and S&P in recent months as the exchange attempts to lessen its reliance on its two flagship products — options tied to the S&P 500 and options tied to the Vix.

Cboe said it had no immediate plans to develop exchange-traded options tied directly to the new credit indices, but Scheepers said he expected investors to use them as signals for trading in other assets, and to incorporate them as triggers for structured instruments.

Like the original Vix, the credit indices will work by distilling the prices of thousands of different derivatives contracts into a single number that can be used as a shorthand for investor expectations about the state of the market in one month’s time.