March 2025
Fixed Income Monthly Report
Chris Edmonds
President, Fixed Income & Data Services
ICE
Credit derivatives volatility spikes as global trade tensions intensify
Financial markets move fast, but the startling velocity of the reversal in both U.S. equities and fixed income over the past month warrants a closer look.
As recently as mid-February, both asset classes were flying high, buoyed by positive investor sentiment around the new administration in Washington D.C. The S&P 500 touched all-time highs on February 19, while yields on the benchmark 10-year U.S. Treasury stood at 4.54%, a minor retreat from their 18-month high on January 13.
What a difference a month makes. After four weeks of investor uncertainty surrounding on-again/off-again tariffs with some of the U.S.’ largest trading partners, as of late March the S&P 500 is flirting with correction territory, and the yield on the 10-year Treasury has fallen below 4.2%.1 2
ICE has been closely monitoring credit derivatives data to see how the tariff uncertainty is impacting fixed income investor behavior. In particular, we’ve been looking at credit default swap (CDS) indices, which are a useful barometer for gauging investor sentiment and anxiety in corporate bonds.
Explained simply, a CDS index takes a basket of 50 to 125 corporate bond issuers and aggregates the cost to buy five-year CDS protection on the bonds of each of the constituent names. By doing this, a CDS index produces a single number that indicates whether investors are growing more concerned about the possibility of corporate credit defaults (index rising) or less concerned (index falling).
In our analysis we looked at the four main CDS indices:
- The CDX NA IG index tracks CDS on 125 North American investment grade corporate bond issuers
- The CDX NA HY index tracks CDS on 100 North American high yield corporate bond issuers
- The iTraxx Europe Main tracks CDS on 125 European investment grade corporate bond issuers
- The iTraxx Europe Crossover tracks CDS on 50 European non-investment grade (high yield) corporate bond issuers
These four indices are useful because they not only provide visibility into how fixed income investors are reacting to the tariff uncertainty on both sides of the Atlantic, but also shine a light on their impact up and down the credit quality spectrum. So, what are we seeing?
Figure 1. One-month at-the-money volatility for iTraxx Europe IG & HY and CDX North America IG & HY indices, Sep 2024 - Mar 2025
Source: ICE Data Derivatives
Figure 1 captures daily one-month volatility for the indices from September 27, 2024, up to March 20, 2025. Volatility decreased across the board in the weeks following the U.S. election in early November and - other than a spike coinciding with a surge in government bond yields in mid-January - volatility remained muted into the middle of February.
As the chart demonstrates, on February 20, CDS on North American investment grade credits were experiencing less volatility than European high-yield names, and much less than investment grade European credits.
One month later the picture has almost entirely reversed. CDS on North American investment grade issuers are now experiencing the highest volatility by far, while the cost of credit protection on North American high-yield names - which were the least volatile of all four indices a month ago - are today more volatile than European investment grade credits.
Elements of this picture are understandable: investment grade corporate issuers include multinational corporations that gather a significant portion of their revenues from international operations and are consequently more likely to be exposed to tariffs on cross-border flows. Accordingly, it is investment grade names in both North America and Europe that are seeing the most heightened volatility in their CDS as investors take out credit protection.
More intriguing is the surge in volatility for CDS on North American high-yield credits, which has been much sharper than the corresponding uptick for high-yield European names. This discrepancy is likely due to the comparatively small size of the Canadian domestic market. In 2024, 77% of all Canadian exports were to the U.S., while just 18% of American exports crossed the northern border.3 For the EU by contrast, the U.S. market accounted for just 20% of total exports in 2024, with the bloc receiving just under 14% of American exports.4
High yield corporate constituents of the iTraxx Crossover index have the ability to redirect exports into the $20.2 trillion domestic EU market.5 Canadian constituents of the CDX HY index are in a tighter spot, however, only being able to redirect export goods into a $2.3 trillion domestic market.6 In this light, it’s not hard to see why high-yield corporate bond investors are buying more CDS protection on their North American portfolio relative to their European holdings.
Where are investor assets going?
While bondholders take these steps in credit derivatives, question remains over where investors are reallocating assets as they pare back their exposure to U.S. equities.
Money market funds are the historical safe haven to which investors flock during market turbulence, and the vehicles have continued to fill that traditional role during the current episode. Data from the U.S. Office of Financial Research reveals that U.S. money market fund balances reached $7.3 trillion in February 2025, swelling by approximately $400 billion since October 2024.7
Fixed income has seen investor outflows in March, but only a fraction of those experienced by U.S. equities. Data from the Investment Company Institute (ICI) on mutual fund and ETF flows reveals that bond funds have experienced approximately $2.3 billion in outflows in the first two weeks of March, but U.S. equity funds saw almost $33.4 billion over the same period.8
| 03/12/2025 | 03/05/2025 | 2/26/2025 | 2/19/2025 | 02/12/2025 | |
|---|---|---|---|---|---|
| (USD millions) | |||||
| Total equity | -28,974 | -16,911 | -14,353 | -6,870 | -12,491 |
| Domestic | -21,880 | -11,491 | -9,056 | -3,857 | -9,551 |
| World | -7,094 | -5,419 | -5,296 | -3,031 | -2,940 |
| Hybrid | -3,974 | -2,847 | -1,980 | -1,512 | -1,171 |
| Total bond | -1,687 | -604 | 4,058 | 3,853 | 1,131 |
| Taxable | -2,063 | -1,023 | 2,721 | 3,218 | 1,468 |
| Municipal | 376 | 419 | 1,337 | 635 | -336 |
| Total | -34,635 | -20,361 | -12,274 | -4,529 | -12,531 |
Figure 2. Estimated long-term mutual fund and exchange-traded fund flows, Feb 12 - Mar 12, 2025 (millions of dollars)
Source: Investment Company Institute
Despite much market chatter about a secular rotation by equity investors out of U.S. stocks and into developed market ex-U.S. equities, the ICI data does not bear this out. Expectations that sharply increased European defense spending may reinvigorate languishing continental equity markets appear ill-founded at this stage, with sustained outflows from international stocks over the past five weeks.
ICE Fixed Income and Data Services will continue to closely monitor developments across asset classes and looks forward to sharing further insights with you in the months ahead.
Regulatory Corner
Recent regulatory updates in the financial markets.
- SEC Names Rule Implementation Delayed: The SEC recently extended the compliance date for the amendments to the Investment Company Names Rules (Press Release) by six months from December 2025 until June 2026 for large funds (and another six months for small fund families).
- EU Omnibus Draft Bill: The European Commission published an omnibus in late February designed to reduce the scope and extend the implementation deadline for the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and EU Taxonomy. If adopted, this proposal will remove certain entities from required sustainability disclosures within the EU.
ICE: providing clients with high-quality global bond pricing
ICE serves global, multi-asset firms integrating big data and new technologies into their workflows. Learn how ICE', data, technology and expertise are bringing transparency to global bond pricing.
Jeff Sprecher inducted into FIA Hall of Fame
ICE Founder, Chair and CEO Jeff Sprecher was inducted into the Futures Industry Association Hall of Fame at the group's annual conference in Boca Raton, Florida on March 12.
The Hall of Fame celebrates individuals in the listed and cleared derivatives industry who have made key contributions to the markets during their careers. Members are selected based on their lifetime contributions to the industry, with a focus on demonstrated leadership, innovative and impactful achievement, break-through accomplishment, industry collaboration, volunteerism and dedication.
Read more about the FIA Hall of Fame and Jeff’s induction article here.
ICE Experience 2025
In mid-March ICE hosted over 3,000 industry professionals for an incredible week at ICE Experience 2025 in Las Vegas. Teams across the company collaborated to deliver a valuable client event that brought together more than 1,500 ICE customers, over 800 business partners and almost 700 others.
ICE Experience is the premier event for the mortgage technology industry, bringing together industry leaders, experts, and innovators to discuss the latest trends, insights and advancements shaping the future of mortgage lending.
Click the video to see just a few of the highlights from the event.
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