CDX Index: IG and HY Credit Benchmarks Explained

Key Takeaways

• CDX.NA.IG contains 125 equally-weighted investment-grade names with a 100 bp standard coupon; CDX.NA.HY contains 100 high-yield names with a 500 bp coupon and quotes on a price rather than spread basis.
• New on-the-run series launch every March and September; old series remain tradeable but liquidity migrates to the new vintage.
• When a constituent triggers a credit event, it is split out and settled individually at its 0.8% (IG) or 1% (HY) weight; the index continues with reduced notional.
• CDX tranches slice the index loss distribution into equity (0–3%), mezzanine, and super-senior layers, the synthetic equivalent of a CLO capital structure on the index basket.

What It Is

A CDX index is a standardized CDS contract on a fixed basket of reference entities, administered by S&P Global's credit index business (formerly IHS Markit). Buying or selling protection on CDX is economically identical to trading CDS on every constituent simultaneously, in equal-weighted notionals.

Two main North American indices:

• CDX.NA.IG: 125 investment-grade North American corporates, equally weighted, standard 100 basis point coupon, 5-year being the most liquid tenor.
• CDX.NA.HY: 100 high-yield North American corporates, equally weighted, standard 500 basis point coupon, trades on price rather than spread.

European sibling indices (iTraxx Europe, iTraxx Crossover) follow the same template. Emerging markets use CDX.EM.

The Intuition

A credit portfolio manager who wants broad exposure or a broad hedge does not want to trade 125 individual CDS names one by one. A CDX contract packages that basket into a single trade with a single spread. Liquidity concentrates in the index, making bid-ask spreads on CDX.NA.IG roughly one-tenth of a single name in many periods.

Indices also serve as the market's credit beta. When the HY market is stressed, CDX.HY price falls (spreads widen). When risk returns, CDX.HY price rises. Traders use the index both as an outright directional instrument and as the hedge leg in single-name relative-value trades.

How It Works

A new on-the-run series is launched twice a year, in March and September. Each series has a new vintage of constituents and a 5-year maturity counted from the series roll date. Old series continue to trade but become less liquid; the on-the-run series captures most of the flow.

Rules for index composition:

• Equal weighting. Each name is 1/125 of CDX.NA.IG notional or 1/100 of CDX.NA.HY notional.
• Liquidity screen. Constituents must meet volume and dealer-quote thresholds in the underlying single-name CDS market.
• Rating screen. IG constituents must be investment grade at roll; HY constituents are sub-investment grade. Crossover contains BBB/BB names.
• Refresh at roll. At each new series, names that no longer meet criteria are dropped and replaced. Dropped names remain in their original vintage series until that series matures.

Trading conventions. CDX.NA.IG quotes as a running spread. CDX.NA.HY quotes on a price basis (similar to a bond, where 100 is par). Both use upfront adjustment against the standard coupon, exactly like single-name CDS post-Big Bang.

Upfront_IG = (market_spread - 100 bps) * Risky_PV01
Upfront_HY = (100 - market_price) / 100, expressed in percent of notional

Credit event handling. If a constituent triggers a credit event, the name is split out of the index and settled as an individual CDS auction at its weight. The index continues with the remaining names and a reduced notional.

Tranches. CDX index tranches slice the loss distribution of the basket. Standard IG tranches are 0 to 3 percent (equity), 3 to 7 percent, 7 to 15 percent, and 15 to 100 percent (super-senior). Tranches are the synthetic analog of CLO capital structure but reference the index portfolio rather than loans.

Worked Example

A macro fund is bearish on US high yield ahead of an expected slowdown. It buys 100 million dollars of protection on CDX.NA.HY Series 42 (hypothetical on-the-run series) 5-year.

At trade date, the index trades at a price of 101.5 on the 500 basis point coupon. Upfront from buyer to seller: (100 - 101.5) / 100 times 100 million equals a 1.5 million dollar payment from seller to buyer (negative upfront because the index trades above par). The buyer then pays 500 basis points per year on 100 million notional, or about 1.25 million per quarter.

Three months later, HY spreads widen and the index price falls to 98. The mark-to-market gain for the protection buyer is roughly (101.5 - 98) percent times 100 million, or 3.5 million dollars before accrued premium costs. The fund can close by selling equal notional of protection at the new price.

Common Mistakes

• Confusing HY quoting convention. CDX.NA.HY trades on price like a bond, not on spread. A rising price means tighter spreads, opposite of what a CDX.IG spread chart shows.
• Ignoring the roll calendar. On-the-run liquidity shifts every March and September. Holding an off-the-run series can mean paying a wider bid-ask to exit.
• Assuming index replicates basket. The CDX-single-name basis can widen several basis points around stress events. Hedging a portfolio with CDX is approximate, not exact.
• Mis-applying tranche greeks. The equity tranche is long correlation; senior tranches are short correlation. Trading tranches without a pricing model that solves for implied correlation leads to hidden exposure.
• Forgetting that restructuring terms differ. CDX.NA.IG uses XR (No Restructuring), while iTraxx Europe uses MMR. The same name in both indices is not a perfect hedge of the other.

Frequently Asked Questions

Why does CDX.NA.HY quote on a price basis rather than a spread basis? High-yield CDS spreads can be very large, sometimes several thousand basis points, and can change dramatically in short periods, making spread quoting impractical. Quoting on a price basis like a bond (100 = par, below 100 = discounted, above 100 = premium) provides a more intuitive sense of mark-to-market P&L. A CDX.HY position that moves from 98 to 95 has lost 3 points per 100 of notional, which is directly comparable to bond P&L. Investors must remember that for HY, rising price means tighter spreads (bullish) and falling price means wider spreads (bearish), the inverse of how IG spread direction is quoted.

What happens to an IG constituent that gets downgraded to high yield mid-series? Once a series is launched, its constituents are fixed for the life of that series even if the credit quality of a name deteriorates. A name downgraded to high yield during the series' life remains in the IG index and CDS traders must adjust their credit analysis accordingly. The name will not be included in the next on-the-run IG series, but holders of the current series continue to have IG index exposure to that deteriorated name, which can create unintended credit concentration. This is one reason traders prefer to roll to the new on-the-run series promptly after each roll date.

How do CDX index tranches differ from single-name CDS? CDX tranches reference the loss distribution of the entire CDX basket rather than a single issuer. The equity tranche (0 to 3 percent of notional) absorbs the first losses from any defaults in the pool; the super-senior tranche (15 to 100 percent) absorbs only extreme systemic loss. Tranches trade on a correlation-implied basis: the equity tranche price reflects assumptions about how correlated defaults in the basket are, and the super-senior tranche is relatively insensitive to individual defaults but very sensitive to correlation spikes that could bring mass simultaneous defaults. Trading tranches requires a model that solves for implied correlation, typically a Gaussian or Student-t copula.

What liquidity advantage does CDX offer over single-name CDS? CDX.NA.IG is quoted by multiple dealers simultaneously with bid-ask spreads of roughly half a basis point on 5-year protection in normal markets, compared to one to several basis points for individual names. The concentration of hedging and speculative flow into a single on-the-run contract creates deep two-way markets that allow large trades, hundreds of millions of dollars, to execute without moving the market significantly. Single-name CDS can be illiquid for names outside the benchmark index, and bespoke corporate CDS for off-the-run credits may require dealer negotiation. This liquidity premium makes CDX the default instrument for broad credit hedging by portfolio managers and macro funds.

How does the CDX-single-name basis arise and why does it matter? The CDX basis is the difference between the index spread and the PV01-weighted average of its constituent single-name CDS spreads. In normal markets it is close to zero because arbitrageurs keep the two aligned. During stress events, investors rush to buy CDX protection because it is immediately available and liquid, pushing the index spread wider than the constituent average. The resulting positive basis means hedging a portfolio of single-name bonds with CDX index protection is imperfect: the index may move differently than the individual names, and unwinding the hedge requires crossing bid-ask on both the index and the single names.

Sources

1. S&P Global Market Intelligence (Markit). Credit Indices Methodology and CDX/iTraxx Documentation. https://www.spglobal.com/marketintelligence/en/mi/products/credit-indices.html
2. Intercontinental Exchange. ICE Clear Credit CDX and iTraxx Products. https://www.ice.com/clear-credit/products
3. ISDA. 2014 Credit Derivatives Definitions and Index Annex. https://www.isda.org/book/2014-isda-credit-derivatives-definitions/
4. Bank for International Settlements. OTC Derivatives Statistics, Credit Indices. https://www.bis.org/statistics/derstats.htm
5. Depository Trust and Clearing Corporation. Credit Derivatives Repository Data. https://www.dtcc.com/repository-otc-data

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.