The U.S. Treasury market
Returns based on the ten-year, zero-coupon yield were -12.4 percent for the two-month period ending May 5. The decline is the largest since August 2003 (-14.6 percent), and April 1994 before that (-13.0 percent). In this commentary, Adrian and Fleming investigate whether longer-term yield changes are better explained by expectations of higher short-term rates or by investors demanding greater compensation for holding Treasury securities.
To proceed with their analysis, they define as a selloff the incidence when cumulative returns for a hypothetical ten-year, zero-coupon Treasury security fall below the maximum for the year-to-date. They find that:
- The current selloff is the largest in 40 years;
- Of the forty-one other selloffs since 1971 with cumulative returns below -5 percent, only five have lasted 450 days, the length of the current selloff as of May 20;
- The increase in yields over the first year or so of the current selloff (starting in August 2020) can be explained by a rising term premium;
- The mounting negative returns since late 2021, amidst increasing prospects of tighter monetary policy, can be explained by expectations of higher short-term rates.
The Bond Market Selloff in Historical Perspective
By: Tobias Adrian, Michael Fleming – IMF, Federal Reserve Bank of New York
The U.S. corporate market
The Federal Reserve Bank of New York has constructed the Corporate Bond Market Distress Index (CMDI) in order to detect dislocations in the primary and secondary corporate bond markets. The index incorporates a wide range of indicators, including measures of primary market issuance and pricing, secondary market pricing and liquidity conditions, and the relative pricing between traded and nontraded bonds.
At the end of June, CMDI indicated that the corporate bond market functioning appeared healthy, with the overall market-level CMDI below its historical median. Market functioning was somewhat more strained in the investment-grade segment of the market.
What Is Corporate Bond Market Distress?
By: Nina Boyarchenko, Richard Crump, Anna Kovner, Or Shachar – Federal Reserve Bank of New York
