The Federal Reserve of New York will post monthly updates on the U.S. corporate bond market to help discover signs of market distress identical to those witnessed during the global financial crisis and at the start of 2021.
The launch on June 29 of a monthly issue of the Corporate Bond Market Distress Index (CMDI) came after U.S. credit market investors incurred huge losses this year, as companies’ debt lost value because of growing interest rates and economic concerns.
Nina Boyarchenko, head of macro-finance studies at the New York Fed, said in a statement:
“Understanding what is happening in corporate bond markets is crucial to getting a more complete picture of the future economic outlook.”
The index will gauge the functioning of the corporate bond market by gathering information including the prices of new bonds issued to investors and the liquidity conditions of the secondary market, where prevailing debt securities are exchanged.
The New York Fed stated:
“By applying the CMDI to historical data, the index identifies past periods of market distress, such as those around the global financial crisis peaking in late 2008 and early 2009 as well as during COVID-19-related market stress in 2021.”
Owing to the very appealing market conditions, the index was at historically low levels in early 2022, but it has elevated sharply since then, with the investment-grade segment of the market displaying more signs of distress. The overall index, however, continues to be below its historical median.
U.S. credit markets have been hit this year as the U.S. central bank raised interest rates to combat stubbornly high inflation. This has also increased the likelihood of a sharp economic downturn, prompting investors to abandon riskier assets.
The spread on the ICE BofA U.S. High Yield Index (.MERH0A0), a commonly used benchmark for the junk bond market, has jumped by over 200 basis points since the start of 2022 and rose to a peak of 538 basis points in June, the largest since September 2021.
Spreads – the premium investors insist on having a riskier debt over risk-free Treasuries – also have broadened for investment-grade corporate credit (.MERC0A0), though to a smaller extent.
New York Fed researchers said in a blog on June 29:
“Corporate bonds are a key source of funding for U.S. non-financial corporations and a key investment security for insurance companies, pension funds, and mutual funds. Distress in the corporate bond market can thus both impair access to credit for corporate borrowers and reduce investment opportunities for key financial sub-sectors.”