As recession fears tighten their grip on financial markets, the Federal Reserve Bank of New York is launching a monthly gauge aimed at tracking distress in the $10 trillion market for U.S. corporate debt.
The Corporate Bond Market Distress Index or CMDI, is designed to help investors understand what is driving changes in bond prices, the bank said in a Friday news release. In healthy markets, price movements are usually fueled by investors’ changing views about economic conditions and risk levels. But during times of extreme uncertainty, bond prices can also swing wildly if the market itself comes under stress, with traders having trouble finding willing buyers and sellers.
The CMDI, first outlined by New York Fed staffers in a research paper last year, aims to explain what is behind price moves by tracking measures of bond issuance, liquidity and trading patterns. Starting June 29, the Fed plans to publish CMDI values on the last Wednesday of each month.
Fed researchers applied the gauge to historical data and found that it accurately spotted past moments of bond-market turmoil. For example, the index spiked during the 2008 financial crisis, and ticked higher again during other dicey periods over the last 10 years, such as the European debt crisis in the early 2010s. Another big spike came in early 2020, when the pandemic seized financial markets.
Over the last week, as the Federal Reserve enacted its biggest interest-rate increase since 1994, the premiums investors demand to hold corporate bonds instead of ultra-safe Treasury debt have climbed with traders showing the most concern about the riskiest corners of the market. Many investors have been growing worried that the Fed’s aggressive stance against inflation could tip the economy into recession.
Junk-rated bonds are now offering investors yields that are 5.08 percentage points higher than Treasury yields, compared with a 4.38-percentage-point spread a week ago, according to Bloomberg data. Investment-grade corporate bonds are trading at premiums of 1.44 percentage points more than Treasurys, up from 1.36 points a week ago. Bond yields fall as prices rise