The composite RSM US Financial Conditions Index opened Tuesday at 0.2 standard deviations below zero. Although not significantly different from normal levels of risk, the overall trend shows a loss of confidence and increased volatility, as would be expected at a moment of geopolitical uncertainty.
A decline in the equity markets over the past 25 years has coincided with a deceleration of financial conditions. Over the past six weeks, the S&P 500 and the NASDAQ have been giving up their gains, with the increase in volatility to above-average levels signaling greater risk for investors.
The spreads between commercial money market interest rates and risk-free instruments remain below average, but are still increasing. If spreads were to continue to widen, we would expect central banks to step in and flood the markets with liquidity as they have done in the recent past.
The U.S. bond market is benefiting from safe-haven demand for Treasury bonds—the yield on 10-year Treasury securities has dropped by 27 basis points since Feb. 15—causing spreads for higher-risk corporate bonds to widen. The flattening of the Treasury yield curve is signaling greater risk of an economic slowdown and perhaps a more prudent monetary policy.
