Financial Conditions : Back to early-2007 levels ?

22 Jan

Financial Conditions : Back to early-2007 levels

According to Bloomberg’s US and European financial conditions indices, which take into account a range of indicators of market stress, financial conditions have recently moved to their most benign level since early 2007 (source: Bloomberg)

What’s more, almost all the underlying components that feed into the two indices (spreads between lending levels of different maturity and security such as OIS / LIBOR, or between the yields on governement bonds and swaps, equity and credit market levels and volatilities) are at or close to the most benign levels we have seen over the last ten years(source: Bloomberg).


This comes at a time when realized and implied volatilities across equity and commodity markets are close to 6 year lows (for example see here).

All of this means that we enter 2013 with some of the calmest and most favourable conditions in the financial markets that we have seen for many years.

Or that’s what the indicators tell us anyway – one thing that experience has (or should have) taught us is that financial markets have a habit of springing unexpected surprises. One can argue that all the components of the Financial Conditions indices are somewhat reverse-engineered post the 2008 crisis, and focus too narrowly on the specific measures that characterized that episode; they wouldn’t necessarily capture the stresses that might accompany a crisis originating in a different form, in exactly the same way that indicators based on over-valuation of tech stocks would not have captured the stresses that materialized in 2007 and escalated in 2008.


One Response to “Financial Conditions : Back to early-2007 levels ?”


  1. The Great Rotation or Deja Vu Again – Ray Dalio vs Tyler Durden « Volatility Viewpoints - February 4, 2013

    […] We’re all familiar with the stellar start to 2013 experienced by equity markets. Most developed markets are up between 5 and 6% during January. The VIX index fell to 5 year lows of 12.5 by the end of January (while VIX traded volumes broke new records). Also, many other indicators of key financial stress such as the spread between borrowing rates of different maturity and security, as highlighted in a previous post. […]

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