Financial stress is back, sort of.
The St. Louis Fed’s financial stress index is at its highest point since December, as the stock market shudders and interbank lending rates rise, reflecting worries about the health of debt-riddled European states and their banks.
The index, which tracks changes primarily in interest rates, yield spreads, and volatility, hit 0.475 in its latest reading last Friday, the St. Louis Fed said. That’s up from 0.142 a week earlier and the biggest number since the index was above 0.5 in mid-December.
The rise comes amid rapid-fire shifts in the markets for stocks, bonds, currencies, and other instruments. The dollar index on Friday hit 86, its highest level since last April, as the euro continues to tumble. Stocks have been suffering after last week’s head-scratching flash crash and Monday’s bailout-inspired bounce, while the flow of funds into bonds has slowed sharply.
In the past two weeks, “the market volatility acted like a high powered vacuum, sucking liquidity out of the cash market” for bonds, said Byron Douglass of Credit Derivatives Research.
Still, the index is nowhere near the heights it reached in the weeks after the collapse of Lehman Brothers, when the index hit an all-time high above 5. The St. Louis Fed has been tracking the index since 1993.