The uncertainty over the direction of U.S. monetary policy may be roiling markets, but it isn’t hampering corporate liquidity reports Moody’s Investors Service.
The rating agency says that its Liquidity Stress Index (LSI) remained level in the first half of June, after climbing from a record low at the end of April. The index falls when corporate liquidity appears to improve and rises when it appears to weaken.
“Recent market turbulence owing in part to uncertainty over policy direction at the US Federal Reserve has not affected our broad liquidity measure, which has fluctuated in a range of 2.8%-3.6% for the past year,” said Moody’s vice president and senior credit officer, John Puchalla.
At 3.3%, the index remains well below its historical 7.3% average, Moody’s reports; and far below the record high of 20.9% set in March 2009. Nevertheless, Moody’s says that the recent rise from its record low, coupled with recent market turbulence, “could represent the early rumblings of a slight pullback from the extremely beneficial corporate liquidity conditions of recent years,” says Moody’s.
High-yield bond spreads and yields have risen sharply after indications that the Federal Reserve could start trimming its bond buying program later this year, and bond issuance has fallen sharply as companies grow wary of higher funding costs, Moody’s notes.
But, it says, there is no evidence that speculative-grade companies are losing access to the capital markets. Indeed, with still-solid liquidity, Moody’s expects the U.S. speculative-grade default rate to decline.
Additionally, Moody’s Covenant Stress Index, which measures the extent to which speculative-grade, non-financial companies are at risk of violating debt covenants, is still at low levels too, indicating a low risk of covenant violations over the next 12 to 15 months for most companies.