Financial Stress Composite Signal

Signal Summary:

• The Financial Stress Composite signal (1) indicates a persistent Neutral regime for financial stress, with the composite z-score at -0.539072 as of 2026-01-31.
• This represents stable and normal functioning of credit and funding markets, showing a continued easing trend from prior periods.
• Conviction Band: Medium | Interpretation Confidence: High Confidence | Internal Conflict Flag: No.

Key Dynamics:

• The St. Louis Fed Financial Stress Index (STLFSI4) z-score is -0.240368 (1), indicating subdued systemic stress.
• High-yield option-adjusted spreads (HY_OAS) z-score is -0.731127 (1), reflecting tight credit conditions.
• The inverted 10-year minus 2-year Treasury yield spread (T10Y2Y) z-score is -0.645721 (1), pointing to a less inverted or steeper yield curve.
• All three components consistently signal low or neutral financial stress, maintaining the overall Neutral regime.
• Conditional Invalidation: The signal would reverse to High_Stress if the composite z-score rises above 0.75 (1), particularly driven by widening high-yield spreads or a significant increase in the STLFSI4.

Scenario Balance:

• Base Case dominant: Continued Neutral financial stress, supported by stable to improving credit conditions and a normalized yield curve.
• Upside secondary: A transition to Low_Stress, should HY_OAS and STLFSI4 z-scores decline further, indicating ample liquidity.
• Downside residual: A shift to High_Stress, triggered by a material widening of credit spreads or a sharp increase in systemic stress indicators.

Time Horizon & Aggregation:

• Time Horizon: Cyclical (months), reflecting the monthly frequency of inputs and the rolling window robust standardization (1).
• Aggregation Weight Hint: Medium, due to its consistent assessment of financial conditions, though acknowledging methodological overlaps (1).

Macro Relevance:

• This signal primarily informs on liquidity and risk sentiment (1), reflecting the prevailing credit conditions.
• It indicates a mid-cycle or stable phase where financial stress is not a primary concern.
• Typically interacts with other macro signals by confirming or contradicting assessments of credit availability, investment climate, and overall economic stability.

Data & References:

• St. Louis Fed Financial Stress Index (STLFSI4) as of 2026-01-31 (1).
• ICE BofA U.S. High-Yield Option-Adjusted Spread (HY_OAS) as of 2026-01-31 (1).
• 10-Year minus 2-Year Treasury Yield Spread (T10Y2Y) as of 2026-01-31 (1).
• Additional public datasets that would improve depth or reliability include the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) and broader market volatility indices.