Credit: Rising market dysfunction in US IG market

Signs of distress in otherwise normal functioning US corporate bond market
Group Research, Chang Wei Liang01 Jul 2022
    Photo credit: Unsplash Photo

    The NY Fed recently unveiled its Corporate Bond Market Distress Index (CMDI), a metric that reflects the health (or distress) in US credit market functioning. It is a broad measure that does not only look at credit prices, but also primary and secondary market transaction volumes, as well as liquidity. These separate indicators are combined using optimization techniques to elicit a systemic component of market functioning. Due to limited data access, market functioning is hard to track, and the NY Fed’s provision of the CMDI is a welcome development that improves transparency significantly in credit markets.

    On a headline basis, the CMDI index is showing normal levels of market functioning. However, it is unsettling to find that that the CMDI is now rising very sharply for the most important and largest credit segment, namely the IG market.  The level of distress (or dysfunction) appears to be the worst since the early months of the pandemic. What could explain the poorer market functioning for US IG, compared to HY credit?

    One factor may be due to higher and more volatile bond fund outflows. Indeed, the US-based ICI has estimated 5 consecutive weeks of outflows from bond funds since late May, with outflows further accelerating after the June FOMC meeting. While having a large impact on IG credit, such flow dynamics tend to be less critical for HY markets, as prices/transactions depend more on idiosyncratic firm-level risks. A second factor could be that IG credit has a larger exposure to duration risks compared to HY, since HY offers a greater spread buffer for returns while also having shorter tenors in general. Certainly, growing Fed hawkishness and a more consistent guidance for larger rate hikes are diminishing the allure of longer-tenor IG credit, while tempering the search for yield as rates soar. Notwithstanding these factors, we still see duration-hedged US IG credit to be attractive with an adequate discounting of slowdown risks.

    Chang Wei Liang

    FX & Credit Strategist, Global
    [email protected]
    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.


    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.