Colin Barr

Following the money in banking, economics, and Washington

Stressed out? So is the financial system.

May 14, 2010: 4:23 PM ET

Financial stress is back, sort of.

The St. Louis Fed's financial stress index is at its highest point since December, as the stock market shudders and interbank lending rates rise, reflecting worries about the health of debt-riddled European states and their banks.

Buck starts here?

The index, which tracks changes primarily in interest rates, yield spreads, and volatility, hit 0.475 in its latest reading last Friday, the St. Louis Fed said. That's up from 0.142 a week earlier and the biggest number since the index was above 0.5 in mid-December.

The rise comes amid rapid-fire shifts in the markets for stocks, bonds, currencies, and other instruments. The dollar index on Friday hit 86, its highest level since last April, as the euro continues to tumble. Stocks have been suffering after last week's head-scratching flash crash and Monday's bailout-inspired bounce, while the flow of funds into bonds has slowed sharply.

In the past two weeks, "the market volatility acted like a high powered vacuum, sucking liquidity out of the cash market" for bonds, said Byron Douglass of Credit Derivatives Research.

Still, the index is nowhere near the heights it reached in the weeks after the collapse of Lehman Brothers, when the index hit an all-time high above 5. The St. Louis Fed has been tracking the index since 1993.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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