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By Melanie C. Hilbush
Liquidity conditions in the corporate bond market remain healthy despite the typical seasonal slowdown.
Despite increased market volatility in 2022, the investment grade credit market is healthy and functioning. Secondary trading volumes have been fairly normal so far this year, with the average daily trading volumes at $21.6 billion compared to $20.2 billion for the average of the last five years through July. Even after adjusting for the growth of the corporate bond market, trading volumes in 2022 are only slightly below the average for the prior five years. This indicates that the dealer community is still willing and able to provide liquidity in the corporate bond market.
Looking at the cost of liquidity, bid-ask spreads have certainly widened this year to account for macro conditions, but not prohibitively so given secondary trading volumes. Notably, the more recent decrease in liquidity is also due to seasonal trends in the market. During the summer months, it’s not unusual to see thinner trading as many market participants from the dealer community and the investor base are on vacation.
Additionally, companies have no problem accessing capital in the primary market. While new issue concessions have increased this year, the primary market is open for investment grade corporate issuers. For example, low-BBB-rated Celanese (CE) priced at $7.5 billion on July 7 to fund its acquisition of DuPont’s (DD) Mobility and Materials business.
In June, the Federal Reserve introduced the Corporate Bond Market Distress Index (CMDI) as a standardized metric to monitor the corporate bond market. Given the Fed’s plans to only publish the index on a monthly basis, it is inherently backward looking. However, the CMDI will be an additional tool to observe market stress, given that it incorporates a wide variety of bond market dynamics in both the primary and secondary markets. The CMDI, which ranges from 0 to 1, is currently at 0.2 and, although it’s increased this year, it is still below the historical median of 0.21.
Overall, we think credit markets are healthy and functioning. Liquidity conditions are relatively normal given the elevated volatility and the time of year. Investors are able to transact in either direction as dealers are still providing liquidity. All else equal, we would expect trading volumes to continue to decline as we approach Labor Day weekend, but anticipate that volumes should pick back up in September as we’ve seen in years past.
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