The credit market can be classified into three distinct categories: investment-grade, sub-investment grade and distressed debt. These categories differ in their risk of default. Debt in investment-grade markets is issued by borrowers with a low risk of default and high credit ratings, specifically BBB-Baa3 or higher.

The sub-investment grade category is composed of the high-yield bond, leveraged loan and private high-yield credit markets. While borrowers with speculative or junk credit ratings ( BB+/Ba1 and below) tap into these markets, there are significant differences between these markets and the types of borrowers that they attract. Figure 2 summarizes key similarities and differences, which have important implications for the risk and returns that investors face and are crucial for hedging decisions.

While the hedging ecosystem is highly developed for high-yield bonds, this is not the case for leveraged loans or private credit. Risk in high-yield bonds can be managed using total return swaps (TRS), the high-yield credit default swap index (CDX), exchange-traded funds (ETFs) and recently futures, including our Bloomberg HY Credit futures and Bloomberg HY Duration-Hedged Credit futures. Meanwhile, risk in leveraged loans is primarily managed through TRS and ETFs. This market lacks a transparent, exchange-traded and centrally cleared derivatives market to facilitate efficient risk transfer, a gap that S&P UBS USD Liquid Leveraged Loan Index futures fulfill.

While credit quality is broadly similar across high-yield bonds and leveraged loans (Figure 3), differences in how these debt instruments are structured and the types of borrowers that they attract drive meaningful differences in risk and return.

An important distinction for leveraged loans is that they are floating-rate instruments. Coupons for these instruments are tied to a reference rate, typically CME Term SOFR, plus a quoted spread. Since the reference rate fluctuates, the yield on leveraged loans cannot be calculated in the same manner as high-yield bonds. Instead, the market uses the discount margin (DM), which represents the expected return in excess of the reference rate. Often the three-year DM is used instead of DM to maturity because borrowers often refinance or prepay their loans. The three-year DM is calculated by only considering cash flows for the next three years of the loan’s life and is a common way to track leveraged loan credit spreads.

Fixed-rate high-yield bonds are sensitive to changes in rates while the price of leveraged loans remain relatively stable when rates move. This was seen in 2022 when rate hikes caused a sharp fall in the Bloomberg U.S. Corporate High Yield Index, but not the S&P UBS Leveraged Loan Index (Figure 4). Although leveraged loans protect lenders from interest rate risk, it can squeeze borrowers when rates are rising. For high-yield bonds, the borrower knows exactly what its interest payments will be for the term of the bond. If rates are increasing, the leveraged loan payments increase with them. A company with $500 million in leveraged loans at SOFR + 4% would have seen their cash interest payments increase from $20 million to $45 million over the course of the 2022 interest rate hikes.

Another key difference is that borrowers in these two markets tend to be in different sectors. The top three sectors for leveraged loan borrowers are technology, financial services, and business equipment and services, accounting for over 40% of the S&P UBS USD Liquid Leveraged Loan Index (Figure 5). Meanwhile, the top three sectors for high-yield borrowers are telecommunications, oil and gas, and media. This reflects the fact that software and service companies heavily use the leveraged loan market, often to fund private equity buyouts. Meanwhile, capital-intensive industries, such as telecommunications and oil and gas, typically issue long-term, fixed-rate bonds to fund long-term infrastructure projects.

These sectoral differences are a significant source of basis risk, as highlighted by recent market dynamics. In early 2026, concerns that AI would disrupt software as a service (SaaS) business models led to a widening in credit spreads for software companies, which make up a significant share of the leveraged loan market. This can be seen in the widening of leveraged loan three-year discount margins from about 450 basis points (bps) at the start of the year to about 500 bps at the end of June 2026, while high-yield CDX spreads fell by about 15 bps.

Leveraged loans and private credit share structural features that drive similarities in risk and performance. Unlike high-yield bonds, leveraged loans and private credit do not carry interest rate risk, due to their floating-rate structure. As a result, the primary risk exposure is to the credit of underlying borrowers. Furthermore, their sector exposures closely mirror one another, with both markets maintaining a heavily weighted exposure to the software sector.^[1] These similarities are reflected in returns, where the correlation of quarterly returns is estimated to be 80.6% over the ten years leading up to the end of Q3 2025.^[2]

While the illiquid, held-to-maturity nature of the private credit market reduces the need for hedging, there is no bespoke, liquid derivative market tied to the private credit market. However, because private credit and leveraged loan markets are composed of similar borrowers, futures based on the leveraged loan market emerge as a potential proxy hedging tool. By establishing a short position in Leveraged Loan Index futures, a participant looking to hedge private credit exposure can benefit from a correlated hedging instrument.

Today, the majority of liquidity in the sub-investment grade derivatives market is tied to high-yield bonds. However, there are important differences between high-yield bonds and the broader sub-investment grade credit market. As investors navigate basis risk between various segments of sub-investment grade credit, S&P UBS USD Liquid Leveraged Loan Index futures provide a precise hedging tool for managing risk.

For more information, see Introducing S&P UBS USD Liquid Leveraged Loan Index Futures.

1. See Cai, Fang, and Sharjil Haque (2024). "Private Credit: Characteristics and Risks," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, February 23, 2024, https://doi.org/10.17016/2380-7172.3462.
2. Comparing the S&P UBS USD Liquid Leveraged Loan Index with the Cambridge Associates U.S. Private Credit Index. See Liquidity in an Illiquid Market: Record TRS Volumes on the S&P UBS USD Liquid Leveraged Loan Index.