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Multiple US bank failures in a matter of days has fueled fears of a full-on financial crisis.
Indicators across asset classes — from bond and stock volatility to credit spreads — signal elevated market uncertainty.
These 7 charts capture signs of increased financial market stress over the past few days.
Global markets were already braving a period of extraordinary angst over inflation, interest rates, and recession risk when a sudden string of US bank failures sent shockwaves across the financial world.
That’s pushed investors across stocks, bonds, and commodities into crisis mode — with key market indicators flashing signs of elevated stress and some even lurching toward the extremes of previous turmoils.
US bond-market volatility surged this week to highs unseen since the 2008 credit crisis, while its equity-market equivalent jumped the most in more than a year. The yield premium on low-rated company debt over government securities, a measure of corporate credit risk, rose the most since the pandemic-fueled market tumult of 2020.
The current bout of financial-market turbulence stems from a string of bank collapses over the past week or so. Silicon Valley Bank folded last Friday in the second-biggest such collapse in history. That came just days after Silvergate Capital shut down, and was quickly followed by the closing of Signature Bank.
These events have ignited investor anxiety over the financial health of regional US banks including First Republic and Western Alliance, as well as the Swiss banking giant Credit Suisse, which has been battling internal troubles for years.
Goldman Sachs cited the tremors spreading across the financial system as it raised its odds for a US recession to 35% from 25%, while Tesla CEO Elon Musk warned that there are similarities between the latest bank collapses and the crisis that sparked the 1929 Wall Street crash. However, Moody’s Analytics chief economist Mark Zandi said the current events differ from the 2008 turmoil in several ways.
Here are seven charts that capture rising stress across financial markets, as investors strive to assess whether the recent shocks to the banking system could spiral into a full-blown financial crisis.
1. Bond volatility surges to crisis peaks
A gauge of expected volatility in US Treasuries shot up in the past week as the bank collapses raised uncertainty over the future path of interest rates. Just last week, markets were bracing for the Federal Reserve to go for larger interest-rate increases but now with the risk of financial instability, that’s not a given anymore.
US bond-market volatility has surged to the highest since 2008.
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The ICE Bank of America MOVE Index has soared to levels last seen in 2008, when markets were reeling from the global financial crisis. The extreme volatility in the fixed-income market could have a spillover effect for equities as well, as uncertainty over interest rates makes it difficult to price stocks.
2. VIX hits four-month high on bank stocks rout
The Chicago Board Options Exchange’s CBOE Volatility Index or VIX, which measures expected swings in US stocks, hit a four-month high this week as the selloff in bank stocks spooked investors.
The VIX index of stock-market volatility has hit a 4-month high.
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Last week, the VIX index had its biggest five-day increase since January 2022. The gauge still remains way below the highs hit during previous periods of market turmoil, such as the pandemic-fueled selloff in 2020 and the financial crisis of 2008.
3. High-yield credit spreads widen the most since 2020
An index that captures the risk premium attached to the debt of poorly rated companies just climbed the most since the financial-market turmoil of early 2020, when the world was reeling from the outbreak of the coronavirus.
High-yield credit spreads just jumped the most in three years.
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The ICE Bank of America BBB US Corporate Index rose sharply over the past week or so, reaching the highest level since early November, indicating an increase in the perceived risk tied to US junk bonds.
4. US regional bank stocks crash
Following the back-to-back failures of SVB and Signature, investor sentiment has soured toward US lenders — especially the small- to medium-sized regional ones. Shares of such entities including First Republic, Western Alliance Bank, and PacWest have taken a thrashing in the past few days, especially with Moody’s Investors Service downgrading the US banking system and placing a number of lenders on review for potential rating cuts.
US regional bank shares have crashed in recent days.
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First Republic Bank was downgraded this week by both S&P Global ratings and Fitch Ratings amid concern it could face a run on its deposits even after securing liquidity support from regulators.
5. Bond curve pares extreme inversion
The US bond yield curve, as measured by the difference between 10-year and 2-year rates, saw a sharp pullback this week from levels that represented the biggest inversion in decades. An inverted curve means longer-dated yields are lower than the short-maturity ones, which is the opposite of what’s considered normal in the debt market.
US bond curve sees a sharp pullback from levels of extreme inversion.
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Despite the retreat from extreme levels, the yield slope remains upended. A full reversal of the yield-curve inversion could be seen as the precursor to a severe economic downturn, some experts say.
“Keep an eye on the yield curve ‘de-inverting’. We’re now getting close. The day that happens after an inversion, the countdown to recession starts in earnest: average of 4 months and median of 2 months,” veteran economist David Rosenberg tweeted Wednesday.
6. Two-year yields fall over 100 basis points
US two-year bond yields have plummeted by more than 100 basis points in the past week as the banking turmoil prompted investors to scale back bets that the Fed will push ahead with aggressive interest-rate increases.
2-year Treasury yields have plummeted in the past week.
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Two-year Treasury yields fell as low as 3.70% on Wednesday, from a peak of 5.09% reached a week earlier.
7. Oil market volatility jumps as prices slide
Commodities weren’t spared from the wave of volatility sweeping across global markets. Fears of severe economic repercussions from a potential banking turmoil, which could cause a slump in energy demand, fueled a slide in crude oil prices. WTI crude prices, the US benchmark, have fallen below $70 per barrel to the lowest since 2021.
Oil-market volatility jumped this week as WTI crude prices fell below $70 a barrel.
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At the same time, the increased uncertainty and outsized price fluctuations led to a jump in oil market volatility. The CBOE Crude Oil Volatility Index is on track for the biggest weekly increase in over a year.