NY Fed corporate bond distress index improved slightly in August

By Thomson Reuters Aug 31, 2022 | 6:24 PM

By Shankar Ramakrishnan

(Reuters) – A new index that measures distress in the U.S. corporate bond markets showed a slight improvement in August, data released on Wednesday showed, suggesting an uptick in investor sentiment heading into U.S. Federal Reserve Chair Jerome Powell’s Jackson Hole speech on Aug. 26.

The Federal Reserve of New York’s Corporate Bond Distress Index (CMDI), launched in June with historical data from 2005, is designed to help identify signs of market distress similar to those seen during the global financial crisis and in early 2020, and is keenly watched by investors.

The index for the Investment Grade bond market was 0.39 on Aug. 26 while for the Junk Bond market it was at 0.19, compared with 0.49 for Investment Grade (a two-year high) and 0.26 for the Junk Bond market on July 29.

That is well below the 0.65 for US Investment Grade Bonds and 0.58 for Junk Bonds at the height of the COVID-19 crisis when the Fed announced a liquidity backstop for corporate credit markets.

The improvement in the index as of Aug. 26 is seen as temporary, however. Spreads of Investment Grade and Junk Bonds have since widened, reflecting tighter liquidity conditions after Powell’s speech in which he said the central bank would raise rates as high as needed and keep them there “for some time” to bring down inflation.

The spread on the ICE BofA U.S. High Yield Index was at 490 basis points over U.S. Treasuries on Aug. 30, wider than a 465 bp level on Aug. 26 but tighter than 593 bp on July 4.

The spread on the ICE BofA U.S. Investment Grade Index was at 145 bp on Aug. 30, also wider than 142 bp as on Aug. 26 but tighter than 165 bp on July 4.

“The index portrays a month of two halves for the corporate bond markets,” said Edward Marrinan, macro strategist at SMBC Nikko Securities America.

The first half of the month caught the tail wind of a more bullish phase driven by hopes of a pivot in the Fed’s hawkish policy but that sentiment has now turned bearish, said Marrinan.

(Reporting by Shankar Ramakrishnan; Editing by Matthew Lewis)