No liquidity distress in U.S. bonds: NY Fed economist

By Shankar Ramakrishnan

(Reuters) – Cost of new debt for companies may be at a premium but there is no liquidity distress yet in the U.S. corporate bond markets, said Nina Boyarchenko, head of microfinance studies at the Federal Reserve Bank of New York and a developer of the Corporate Bond Market Distress Index (CMDI).

The index, with historical data dating back to 2005, for U.S. investment grade bonds touched a new two-year high of 0.52 on Oct. 21. That level is just 13 points away from the 0.65 level touched at the height of the COVID-19 crisis when the Fed announced a liquidity backstop for corporate credit markets. CMDI for high-yield bonds, meanwhile, stood at 0.24 versus 0.60 at the height of the COVID crisis.

“There is a lot of discussion about liquidity being impaired in the corporate debt markets but when we look at the realized price impact or bid/ask spreads, it does not look abnormal on a historical basis,” Boyarchenko told Reuters.

The New York Fed’s CMDI for the overall corporate bond market, which helps identify signs of market distress such as during the 2008-2009 global financial crisis and in early 2020, was still below its historical 65th percentile (in a scale of 0-100) as of Oct. 21, said Boyarchenko.

With a spike in cost of new debt – high-yield bond yields rose to 9% as of Nov. 3 from 4.35% on Dec. 31 according to ICE BofA Global data – new corporate bond issuance has slowed.

“From the perspective of market functioning, it is not really a sign of distress,” she said.

Boyarchenko also noted that during a debt binge in 2020-21 companies had issued longer-maturity debt, so they could hold back now.

“We are seeing an evolution of risk aversion from a macro prudential perspective to more normal,” she said.

(Reporting by Shankar Ramakrishnan in New York; Editing by Matthew Lewis)