The Federal Reserve Bank of New York’s dysfunction index, which measures the operational health of US investment-grade credit markets, reached its highest level in nearly three years this week. This stress signal in the US high-grade corporate bond market historically precedes broader risk contagion across asset classes. The index evaluates bid-ask spreads, price impact, and trading volumes: when it spikes, trades become more expensive, liquidity thins out, and price discovery worsens. Major stablecoin issuers hold significant reserves in US Treasuries and investment-grade corporate debt, raising questions about their ability to liquidate those positions during a stress scenario. Digital asset portfolio managers should monitor correlations between credit spreads and crypto volatility metrics, as well as any slowdown in institutional flows into Bitcoin ETFs.
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