Out of the GFC playbook, the Federal Reserve of New York will publish monthly updates on the U.S. corporate bond market to help identify signs of distress according to Reuters.
A monthly publication of the Corporate Bond Market Distress Index (CMDI) follows U.S. credit market investors suffering heavy losses this year as companies’ debt lost value due to rising interest rates and economic concerns.
In a statement, the New York Fed said that the CMDI is a unified measure that identifies periods of dislocations and is associated with future realizations of other financial market conditions. 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 CMDI quantifies corporate bond market distress from a ‘preponderance of metrics’ perspective, meaning the index identifies as “distress” periods during which a large number of individual measures of market functioning indicate deteriorating conditions in both the primary and the secondary markets for corporate bonds.
“The CMDI uniquely offers a single snapshot of the state of the corporate bond market, summarizing both primary and secondary market conditions,” said Anna Kovner, Director of Financial Stability Policy Research at the New York Fed. “The index allows us to understand what it means for a particular market to be in distress and assesses various indicators from a holistic perspective, something that previously did not exist in the market.”
Also read: ETF Investors Reduce Credit Risk As Recession Fears Spike
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 Corporate Bond Market Distress Index will be updated on the last Wednesday of each month.
The New York Federal Reserve also published a Liberty Street Economics blog post describing what constitutes corporate bond market distress and the motivations behind the construction of the index.
