NY Fed starts publishing corporate bond market distress index

BY Reuters | CORPORATE | 06/29/22 10:00 AM EDT

By Davide Barbuscia

NEW YORK, June 29 (Reuters) - 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 in 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.

U.S. credit markets have been slammed this year as the U.S. Federal Reserve 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 over 200 basis points year-to-date, 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 - have widened also 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.

(Reporting by Davide Barbuscia Editing by Nick Zieminski)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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