The St. Louis Fed’s Financial Stress Index remained consistent with low stress in the historical context, but the reading was up 0.274 to -0.936 in the week ended March 6, within reach of the readings seen in late 2018 and early 2019 when a partial federal government shutdown was threatened and then materialized into a 35-day ordeal. As of the end of last week, the S&P 500 index had fallen to levels not seen since early 2019. Treasury yields reached record lows in the week. Worries about businesses’ ability to service their debt were on the rise. The Fed’s 50 basis point rate cut on March 3 and the signing of a $8.5 billion funding package for public health resources in coronavirus outbreak were some help in assuring that the central bank and government were prepared to act. The gap in yields between 3-month bills and 10-year notes was no longer negative, but worries about an economic downturn were visible elsewhere.
Efforts to calm equities markets have not been successful and as of March 11, analysts said US stock markets were in bear territory. While low Treasury yields mean cheap borrowing, it comes at a time when credit standards are likely to tighten.
I would not look for the stress index to change direction next week. The fallout from the rapid drop in equity prices and emergence of strains in credit quality are going to take a further toll.
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