Robin Marshall, MA, MPhil
Head of FICC Research, FTSE Russell
Key takeaways:
- Correlation of Canadian government bond yields, policy rates and credit spreads with the US has fallen, reflecting lower Canadian inflation and debt issuance.
- The case for hedging Canadian credit and interest rate risk independently has increased accordingly.
- To enable independent hedging and trading of Canadian spreads, with no counter-party risk, FTSE Russell has designed the FTSE Canada Bank Credit Spread Index Series.
Points of differentiation:
- The FTSE Canada Bank Credit Spread Index maps credit spreads directly to underlying Canadian govt bonds and futures contracts on the Montreal exchange.
- The ability to blend, or isolate, credit and rate risk are key features of the index, which gives a wide range of use cases for hedging and trading.
- Such use cases are not available in CDS contracts since they are pure credit risk instruments, and also carry bilateral counter-party risk, as OTC derivatives.
What does our research mean for investors?
- Investors can use the FTSE Canada Bank Credit Spread Index, and related futures contracts on the Montreal exchange, to manage their Canadian credit and interest rate risk exposure accurately.
- They can also blend, or isolate, Canadian credit and rate risk, as required.
- This removes the need to use US credit spread products to hedge Canadian credit risks, or CDS contracts, which carry bilateral counter-party risk and have no embedded interest rate exposure.
