Corporate bonds

New York Fed monitors corporate bond distress

The Federal Reserve Bank of New York began publishing its newly created index this week that tracks the health of the U.S. corporate bond market at a time when recession fears have widened credit spreads, limited issuance and drained the liquidity in the corporate credit business.

The Corporate Bond Market Distress Index (CMDI) will be released once a month and will take the pulse of the corporate primary and secondary market, unlike some other corporate bond indices provided by companies like Bank of America, Refinitiv, ICE. Data Services and Bloomberg which primarily focus on price and spread movements of outstanding securities. The index will be updated regularly at 10:00 a.m. New York time on the last Wednesday of each month, the Fed said in a statement.

“While there are a variety of metrics to capture aspects of corporate bond market functioning, there has been little consensus on how to use these metrics to identify periods of widespread distress in the market and on how to weigh different metrics,” the New York Fed said. .

The New York Fed said its indicator will show whether large companies are struggling to access credit and identify episodes of market distress like those seen during the 2008 global financial crisis and the outbreak of the Covid-19 pandemic. 19 in March 2020.

“Understanding what’s happening in corporate bond markets is key to getting a more complete picture of the future economic outlook,” Nina Boyarchenko, head of macrofinancial studies at the New York Fed, said in a statement.

To construct the index, the New York Fed has stated that it will aggregate seven underlying sub-indices: Secondary Market Volume, Secondary Market Liquidity, Secondary Market Duration Spreads, Adjusted Spreads secondary market default, issuance in the primary market, the spread between quoted and traded prices and the spread between primary and secondary market prices.

In its June release of the index on Wednesday, the New York Fed said the broader corporate bond market appeared healthy at the moment, but signs of stress were more pronounced in investment-grade credit than in high yield. The upper segment of the index indicated more distress than at the peak of the 2019 rate hike cycle.

The New York Fed said on its CMDI FAQ web page that “the index does not flag as dislocations all periods when economic fundamentals deteriorate and bond prices react accordingly, underscoring its value as a measure of conditions specific to the corporate bond market”.

“For example, although oil prices began to fall in the summer of 2014, the CMDI did not rise until the fall of 2015, when these shocks led to credit losses in oil companies and translated into by the liquidation of the Third Avenue bond mutual fund and associated distress of the corporate bond market,” the Fed said.

Index improvement

Investors have noted that existing corporate bond indices are still a reliable and useful way to get a daily snapshot of market strength. But some said the New York Fed’s inclusion of new issue price and volume tracking metrics could give a better picture of how the overall market was performing.

“Certainly including primary market metrics makes it much more robust than just looking at spreads,” said Tom Graff, chief investment officer at Facet Wealth.

Companies might be underestimating the difficulty of actually raising funds in the corporate bond market if they only look at credit spreads, without also considering the volume and pace of new issuance. For example, during a series of days in mid-June when investment grade bond prices were zero and spreads were relatively stable, issuers might have thought the primary market was open when in fact it was not. was not.

And others said bond benchmarks don’t fully account for the high cost of entering and exiting a position during periods of market volatility.

“The corporate index was a few basis points wider [on Tuesday], but the market definitely felt worse than that. When you try to sell a bond, it’s not three basis points wider, but the offer is 10 or 20 basis points wider,” said Natalie Trevithick, head of quality credit strategy. superior at Payden & Rygel.

Some index providers take note of this. ICE will start reflecting transaction costs in its bond indices starting in July.