Board of Governors of the Federal Reserve System

Figure 1: BD and HD debt-to-GDP ratios

This chart shows the debt-to-GDP ratios for both nonfinancial business debt (blue line) and household debt (black line) from 1980 to 2020 Q2. Debt-to-GDP ratios are calculated quarterly by dividing the total debt outstanding by GDP. Shaded regions indicate periods of business recession as defined by the National Bureau of Economic Research. In recent years, nonfinancial business debt has been showing an upward trend, while household debt showed a steady downward trend since the 2008 financial crisis. As of year-end 2019, household and nonfinancial business debt both stand at around $16.1 trillion or 74% of GDP. Since the onset of the COVID-19 crisis, the GDP has contracted sharply as a result of the economic slowdown, while corporate debt issuances has accelerated. As of 2020 Q2, the HD and BD debt-to-GDP ratios rose to 82% and 90% of GDP, respectively.

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Figure 2: Share of BBB-rated IG business debt by holder type (in billions)

Figure 2 shows a decomposition of investment-grade debt held by banks, mutual funds, and insurers into just investment grade (BBB) and high investment grade (>=A-). The BBB category includes BBB-, BBB, and BBB+. At banks (left panel), almost two thirds, or around $1.2 trillion, of the current credit commitments to nonfinancial firms are to borrowers rated BBB. At mutual funds (middle panel), the share of BBB-rated bonds is around 47%, or $434 billion. Lastly, more than half (55%, or $605 billion) of insurers IG corporate bond holdings are rated BBB (right panel).

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Figure 3: Taxable Bond Fund and ETF Flows

Figure 3 shows the flow of taxable bond fund and ETFs around the announcement date of the Secondary Market Corporate Facility (SMCCF) on March 23, 2020. The top panel shows the flows for the investment grade funds and the bottom for the high yield bond funds. In the bottom panel, the red bar represents the flow of the ETFs while the dark blue bar and light blue bar indicate the flow of the short-term and long-term bond mutual funds, respectively. In the bottom panel, the red bar represents the ETF flows, while dark blue and light blue is for bank loan mutual funds and other high yield mutual funds, respectively. The announcement of SMCCF appears to have had a calming effect across corporate bond markets, both investment grade and high yield. High yield bond funds even showed some reversals in April and May.

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Figure 4: Bloomberg Barclays Fallen Angels Index

Figure 4 shows the market capitalization (blue line, left axis) and the number (redline, right axis) of constituents of the Bloomberg Barclay Fallen Angel Index from March 2005 to October 2020. Due to the effect of the COVID19, the number of fallen angels has increased dramatically in March 2020. While at the end of February, the index covered around 260 bonds, with total market cap of $188 billions, it reached 360 by the end of March and 422, with total market cap of $547 billions, by the end of October. In response to the growing concerns about these fallen angels, the Federal Reserve Board extended the SMCCF on April 9, 2020.

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Figure 5: MBS spreads

Figure 5 shows spreads in the mortgage markets in daily level. The black line represents the MBS Yield to duration-matched treasury yield, while the red line represents the MBS yield to 10-year treasury yield. In early March, the primary mortgage rates increased sharply amid deteriorating secondary market liquidity and elevated volatility. MBS spreads also widened significantly and exceeded levels last seen during the European debt crisis. On March 15th, the FOMC announced that the Committee will increase its holdings of agency mortgage-backed securities by at least $200 billions over the coming months to restore orderly market functioning in the primary and secondary mortgage markets. After the announcement, mortgage market functioning gradually improved and spreads returned to normal levels as observed in the charts.

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Figure 6: Selected ABS spreads

Figure 6 shows the spreads of selected asset-backed securities in weekly level from January 2019 to October 2020. The black line shows the spread for fixed prime auto ABS, while red and blue represents the spread for fixed credit card and FFELP student loans ABS respectively. All three ABS spread widened sharply starting in late February 2020, as primary market issuance slowed and secondary market trading became impaired. To alleviate the strains in these markets, the FOMC re-established the Term Asset-Backed Securities Loan Facility (TALF) and shortly after these measures were announced, conditions in the consumer ABS market began to ease.

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