Financial Stress Moderating, At Least By Some Measures

The measures of financial stress based on short-term markets are looking much better, though bond-market related measures are slow to improve.  The most popular measure of stress is the TED spread, which is the difference between interest rates on inter-bank loans (LIBOR) and Treasury Bills.

We're getting so close to normal that some complacency–but that would be a mistake.  The low TED-spread probably reflects central bank and government guarantees of bank borrowing.

Another measure of stress in short-term markets is the interest rate spread between the safest commercial paper and somewhat riskier paper, which is the difference between A2P2-rated paper and AA-rated paper.

There may be some implicit guarantee helping the spread, but not as much as in the case of bank debt.  This is very good news.

Bond market stress measures continue to improve, but have not yet come down to normal levels.  BAA bonds are investment grade (if you believe the ratings agencies), and we can compare their yields to 10-year Treasury Bonds.

My final measure of stress is the spread of junk bond interest rates over the 10-year Treasury

Economists at the Kansas City Federal Reserve Bank have recently developed a more comprehensive index of financial stress that incorporates 11 components.  The developers of the index, Craig S. Hakkio and William R. Keeton, have written up their results in a good article, which though somewhat lengthy provides a good primer for those who want to learn more.  They don't seem to be posting their data online yet, but the charts in their article suggest a relatively small drop in financial stress since the October 2008 peak.