Cleveland Fed leads in measuring stress
By Matthew Goldstein
When you think of Cleveland, finance isn’t the first thing that comes to mind.
But the Cleveland Fed is breaking some new ground with its new and improved financial stress index. In time, I wouldn’t be surprised if the Cleveland Financial Stress Index becomes a regular go to index for traders–especially macro and volatility types. And it probably won’t be long before someone is modeling some algo to track the CFSI performance if it hasn’t already been done.
The first notable innovation with the Cleveland stress index which previously had been published monthly, is now being updated daily. The daily updates will give economists and traders a better real-time look at what is going on in the financial landscape with risk building up in the system.
It’s worth noting that the better-known St. Louis Fed Financial Stress Index is updated weekly. The Kansas City Fed Financial Stress Index is updated monthly.
Beyond the daily updates, the Cleveland index also now tracks stress in real estate and the securitization markets, along with the other sectors it looks at in the stock, credit and funding markets. It’s the addition of the securitization markets, which is most interesting, given the worldwide search for yield–a byproduct of the Federal Reserve’s easy money policies–is reviving various areas of securitization. The three securitized products markets the index will take the temperature of are: residential mortgage securities, commercial mortgage securities and asset backed securities (think credit cards, auto loans, student debt). The index tracks the spread between these different classes of securitized notes and U.S. Treasuries.
Tim Bianco, an economic analyst with the Cleveland Fed, in writing about the new and improved index, says the index has fallen in recent months as the economy shows signs of improving. But he said most of the stress in the financial system this year has come from the index’s measurement of the securitization market. Writes Bianco:
The individual components of the CFSI were elevated at the beginning of 2012—though not to the same degree as during the financial crisis—but as the year progressed, stress in many of these markets decreased, indicating that the potential for widespread stress had fallen. So far in 2013, the CFSI’s securitization market component has been contributing the most to the overall level of stress, while the foreign exchange and funding markets have been contributing little.
With Wall Street firms slowly cranking up the securitization machinery, that component of the index should bear some close watching in the coming months.
1) For those still not familiar with Alan Freed, let the Ramones fill you in.