Saturday, July 2, 2022

New NYFed Corporate Bond Distressed Index provides context for spread increases

 


The NYFed has developed a new corporate bond distressed index and it provides some useful information on the tumult in credit markets. More corporate bond stress should lead to higher bond spreads. The index provides some context for spread increases.

Surprisingly, the index states that the investment grade market is going through more stress than the high yield market. This is interesting because high yield corporate bond spreads are showing greater increases than investment grade spreads as measured by the ICE BofA OAS spreads for CCC and BBB bonds. 

The distress index for investment grade is at the highest level since 2016. It is notable that periods of stress post GFC are associate with transitions in monetary policy.

"The CMDI incorporates a wide range of indicators to understand what is driving bond market functioning. Seven underlying sub-indices contribute to changes in the index: secondary market volume, secondary market liquidity, secondary market duration-matched spreads, secondary market default-adjusted spreads, primary market issuance, the spread between quoted and traded prices, and the spread between primary and secondary market pricing."

The Fed is watching this index and it is good to have as macro indicator, but does it tell us something about what the Fed will do? 

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