Capitalizing on a Rate-Style Swap
MDX swaps offer fundamental efficiencies to counterparties looking to hedge or source exposure to household credit performance. Realized hedging costs are reduced in MDX swaps through the exchange of regular fixed and floating payments. At the same time, the financial leverage available via swaps offers the potential to generate significant returns.
MDX Hedging Costs Are Lower Than Conventional Spreads
The realized hedging cost of an MDX swap is lower than the conventional spread associated with a traded dollar price. Since much of the conventional spread (i.e. fixed leg cost) is offset by floating leg payments, the actual cost is much lower. The conventional spread is the theoretical fixed coupon that makes the upfront price zero1 — in short, the fixed rate leg of the swap. For example, at the Indicative MDX Composite Price of 95.32 on 9/30/2026, the ICE-Vista MDX Swap Calculator (see below) shows a conventional spread of 328bps.
Output from ICE-Vista MDX Calculator
Unlike default-style credit swaps, MDX swaps have rate-style floating leg payments netted monthly against the conventional spread. In this example, the net cost of the swap would be zero if the amount of annualized Credit Events on the reference pool equaled 324bps. Given preliminary forecasts around 225-275bps of annualized floating leg payments, net hedging costs on MDX swaps (or conversely, loss adjusted spreads) are projected to be 50-100bps.
Recent Credit Event Payments Are Higher in MDX than Corporate Credit Indices
The rates-style monthly netting of MDX swap payments, which are determined by the credit performance of mortgage borrowers, differs substantially from the credit risk and realized cost profile of default-style corporate credit index swaps.
The table below shows a comparison of Credit Events between MDX.GN and CDX.HY. Note, since CDX.IG has not experienced a Credit Event since 2008, no comparison is needed.
Sources: CDX Credit Event Payments are calculated from auction and final price information at creditfixings.com (Creditex/S&P Global Credit Event Fixings). MDX information is from Vista Index Services. Note: MDX and Vista Index Services products are not affiliated with or authorized by S&P Dow Jones Indices or the CDX family of indices.
As recent performance shows, Credit Events — and in turn, floating leg payments — on MDX.GN measure significantly higher than on CDX.HY. This trend is due in part to the divergent occurrence of credit stress in household borrowers versus corporate borrowers but also results from the recurring nature of floating MDX swap payments as compared with the episodic and contingent Credit Events in CDX.HY.
Sources: CDX Credit Event Payments are calculated from auction and final price information at creditfixings.com (Creditex/S&P Global Credit Event Fixings). MDX information is from Vista Index Services.
From a P&L standpoint, these differences, coupled with current indicative pricing, suggest lower realized hedging costs and lower realized cashflow volatility. MDX offers an attractive option to hedgers that seek payments tied more closely to the cadence, cashflow volatility, and credit stress rate of household debt.
Return Profile Harnesses the Financial Leverage Benefits of Derivatives
The linear risk profile of MDX swaps offers an attractive investment profile for levered return. The table below demonstrates the levered return profile of MDX swaps using a loss adjusted spread (LAS) of +100bps with +/-a 50bp variation using 10x and 20x leverage.
The ability to calibrate financial leverage up to 20x on a 0-100% credit attachment instrument creates unique return opportunities for investors. Unlike cash products that may offer similar loss adjusted spreads, MDX swaps – and derivative products generally – do not have any cost of carry to lever those returns, whether through securitization or repo financing.
What’s Next?
Two dealers have provided indicative MDX pricing over the last several weeks in preparation to open the market for MDX swap trading. The dealers have asked us to encourage you, if you plan on trading, to engage with them around your potential interest. Whether you’re looking to hedge or invest with MDX, your thoughts and feedback are greatly appreciated as sales and trading teams get ready to go!