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NY Fed begins publishing corporate bond market distress index

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The Federal Reserve of New York will publish monthly updates on the U.S. corporate bond market to help identify signs of market distress similar to those seen during the global financial crisis and in early 2020.

The launch on Wednesday of a monthly publication of the Corporate Bond Market Distress Index (CMDI) comes after U.S. credit market investors suffered heavy losses this year, as companies’ debt lost value due to rising interest rates and economic concerns.

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

The index will measure the functioning of the corporate bond market by aggregating information including the prices of new bonds sold to investors and the liquidity conditions of the secondary market, where existing debt securities are traded.

“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 2020,” the New York Fed said.

Due to very accommodative market conditions, the index was at historically low levels at the beginning of this year, but it has risen sharply since then, with the investment-grade segment of the market showing more signs of distress. The overall index, however, remains below its historical median.

U.S. credit markets have been slammed this year as the U.S. central bank hiked interest rates to fight stubbornly high inflation. This has also raised the prospect of a sharp economic slowdown, leading investors to pull out of riskier assets.

The spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, has climbed by more than 200 basis points since the beginning of the year, and reached a peak of 538 basis points this month, the highest since September 2020.

Spreads – the premium investors demand to hold riskier debt over risk-free Treasuries – also have widened for investment grade corporate credit, though to a lesser extent.

“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,” New York Fed researchers said in a blog on Wednesday.

“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,” they said.