Jul 5, 2022 - Economy

Corporate bond market distress growing, but still historically low, NY Fed says

Bonds have sold off a ton this year — just look at Apple. It’s one of the most creditworthy U.S. companies — sitting on loads of cash — and you can pick up its bonds in the secondary market for a mere 70 cents on the dollar, down from around 100 last fall. Seems worrisome!

  • Well, the New York Fed has constructed a new index to evaluate just how distressed — and potentially dysfunctional — the corporate bond market is. The good news: It's actually not that bad right now.

Why it matters: Economic growth is slowing, and the risk of recession is top of mind. What happens in the bond market can provide early signals of broader economic and market woes.

The big picture: The NY Fed index shows that while corporate distress has zoomed up since the beginning of the year, it's actually still below the median historical level.

  • If anything, this shows just how historically loose the conditions of 2021 were. Capital was cheap and abundant, and defaults were minimal — thanks to unprecedented monetary stimulus.
  • Now, we're heading back to "normal."

How it works: The NY Fed researchers created a single index that combines factors in the secondary market — like how easy or hard it is to make a trade, and whether prices are rising or falling — and the primary market, meaning how many bonds companies are issuing and how much they cost.

  • The index value is between 0 and 1; a lower value means the market is functioning better.

State of play: Since the start of the year, corporate bond issuance has fallen, and so have bond prices in secondary trading (meaning yields are up), as we've reported.

  • This is in part because the Federal Open Market Committee (FOMC) is raising rates, in a battle against inflation — and in part because the war in Ukraine is amping up risk across all financial markets.
  • So, when you look at the move in those Apple bonds based on their yield, it may make more sense: they're yielding around 4% now, compared to 2.7% when Apple issued them last August, pricing data from MarketAxess' BondTicker shows.

The bottom line: The FOMC is in the midst of one of the fastest monetary tightening phases in its history — so things could still get messier. Pay attention to this index for signs that the market is struggling to cope.

Editor’s note: This story has been updated to specify that BondTicker is owned by MarketAxess.

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