Market stress indicators flash warnings as banking worries continue

(Reuters) – Fears of a global banking crisis are continuing to swirl, with investors keeping a close eye on a dashboard of indicators that show how stress is rippling through markets and the banking system.

Many of these are continuing to flash warnings, though they have not surpassed levels seen during the COVID-19-fueled market turbulence of 2020. Despite a state-backed takeover of Credit Suisse by UBS AG, a wipeout of some Credit Suisse bondholders has added to concerns over broader bank capital.

Uncertainty around U.S. banks remains high as well. Shares of embattled regional lender First Republic Bank were down 34% Monday afternoon following a downgrade by S&P Global and continuing worries over the banks liquidity despite a $30-billion rescue last week.

Here are some of the indicators investors are watching, and what they are showing:

An indicator of credit-risk in the euro zone banking system, the so-called FRA-OIS spread, hit its highest levels since mid-July last week but has pulled back from those highs.

But the spread, measuring the gap between the euro zone three-month forward rate agreement and the overnight index swap rate, is still relatively elevated at around -1 basis points in a sign of lingering concern about financial market stress.

GRAPHIC:Cost of insuring European junk bonds (https://www.reuters.com/graphics/EUROPE-BONDS/klvygqdrevg/Screenshot%202023-03-20%20at%2016.28.20.png)

The cost of insuring exposure to European junk bonds rose to the highest since mid-November on Monday at over 516 basis points.

This has risen over 130 basis points since March 7 as riskier assets have borne the brunt of bank turmoil on both sides of the Atlantic.

Junk spreads – the premium investors demand to hold the riskier debt over U.S. Treasuries – rose to 520 basis points last week, the highest since October last year, according to the ICE BofA U.S. High Yield Index.

Investment grade credit spreads, which indicate the premium investors demand to hold highly rated corporate bonds over safer U.S. Treasuries – rose to 164 basis points last week, the highest since October, according to the ICE BofA US Corporate Index

GRAPHIC:Euro area credit risk 9https://www.reuters.com/graphics/USA-BONDS/egvbyjawzpq/Screenshot%202023-03-20%20at%2016.27.32.png)

Meanwhile, last weeks wild swings in the Treasury market have whipsawed investors and contributed to unease. The ICE BofAML MOVE Index, a measure of expected volatility in U.S. Treasuries, surged to its highest level since the financial crisis last week as troubles in the banking sector forced investors to pull back on their views of how aggressively the Federal Reserve will raise rates in coming months.

With little certainty on what signal the central bank will send on the future trajectory of monetary policy at the conclusion of its meeting on Tuesday and Wednesday, many believe volatility in Treasuries is unlikely to die down anytime soon.

(Reporting by Davide Barbuscia, Yoruk Bahceli, Dhara Ranasinghe and Amanda Cooper; Graphics by Vincent Flasseur; Editing by Ira Iosebashvili and Cynthia Osterman)