NEW YORK—The Federal Reserve Bank of New York today announced the monthly publication of a first-of-its-kind research product focused on identifying periods of widespread distress in the U.S. corporate bond market. Starting with today’s publication, the Corporate Bond Market Distress Index (CMDI)—a summary metric of U.S. corporate bond market functioning—will be updated regularly at 10:00 AM ET on the last Wednesday of each month. The CMDI was first introduced through a New York Fed Staff Report in January 2021, and a subsequent Liberty Street Economics blog post in February 2021.
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. Additional periods since the beginning of 2022 were identified in a recent Liberty Street Economics blog post in June 2022.
While there are a variety of measures for capturing aspects of corporate bond market functioning, there has been little consensus on how to use those measures to identify periods of widespread distress in the market and on how to weigh different measures. 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.”
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.
“By combining information from many different indicators, the CMDI effectively captures the state of the corporate bond market today, which in turn offers a more informative picture of the corporate bond market tomorrow,” said Nina Boyarchenko, Head of Macrofinance Studies at the New York Fed. “Understanding what is happening in corporate bond markets is crucial to getting a more complete picture of the future economic outlook.”
In conjunction with announcing regular publication of the CMDI, the New York Fed also issued an accompanying Liberty Street Economics blog post describing what constitutes corporate bond market distress and the motivations behind the construction of the index.
For more information on the CMDI and to subscribe to receive regular updates, check out the product page. A downloadable data file will include index values for the market CMDI as well as rating-level readings for the investment-grade and high-yield segments of the credit spectrum.