By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Worries surrounding debt-strapped property developer China Evergrande have put investors on guard for evidence that the crisis may be spilling over into broader markets.

Evergrande was once China’s most-sold property developer. It owes $305 million. Investors are concerned that a collapse may pose systemic risk to China’s financial system, as well as ripple around the globe.

Although there are no signs of panic in credit and money markets so far, this could indicate that the crisis is not spreading outside China.

Stan Shipley of Evercore ISI New York said that Evergrande’s debt linkage to global financial actors was minimal, despite its large size.

As a consequence, the chance of contagion being spread is very low. He said that China is able to use its financial resources to prevent a restructuring or bankruptcy from happening.

Investors are not immune to the current situation. They haven’t forgotten about the 2007 global financial crisis that decimated the world’s money markets, as well as the sovereign debt mess of the Eurozone in 2011, which effectively barred European banks from interbank loans. Most recently, they remember the outbreak of coronavirus that devastated the world economy, leading to huge bailouts by the central banks.

Here are some key barometers of market stress investors are watching:

U.S. LIBOR-OIS

The U.S. LIBOR-OIS spread measures the difference between secured and unsecured lending in the United States and is seen as one measure of strain in money markets.

Higher spreads indicate that banks have become more cautious about lending to one another due to rising costs.

Due to the increased number of vaccinations and reopening states in the U.S., Friday’s LIBOR OIS spread was 3.2 basis points lower than the April pandemic peak of 135.213 base points.

(USD LIBOR-OIS SPREAD – https://fingfx.thomsonreuters.com/gfx/mkt/gdvzyqbxnpw/US%20Libor-OIS.PNG)

FX SWAPS

Cross currency swaps allow investors to raise funds in a particular currency from other funding currencies. A dollar-funded institution can, for example, raise euro funds in the Euro funding market and then convert those proceeds to meet its dollar funding obligations through an FX swap.

These tools were in high demand during 2008’s financial crisis. They also became more prominent after the Eurozone debt crunch. Global regulators invested billions to freeze the market.

One-year Euro/dollar basis Swaps (which measure the demand for dollars from European borrower) were at -11 base points Friday. It indicated that they are prepared to pay slightly more to have dollars.

To convert 1-year euros into US dollars, investors will have to pay 11 basis points more than the interbank rate. The dollar, which is the most liquid currency in the world, has been a favorite destination for investors throughout uncertain times.

They are still far below the levels seen in the aftermath of the 2008 crisis or the pandemic.

Dollar/yen base swaps are at -19.75 points on Friday. This is a far cry from the March 2020 low of -144 points.

(Euro and Yen FX swaps – https://fingfx.thomsonreuters.com/gfx/mkt/zgpombzoypd/Euro%20and%20yen%20FX%20swaps.PNG)

VOLATILITY IN BONDS, FX, STOCKS

Volatility for the three asset classes — stocks, bonds, currencies — has remained comparatively subdued.

The Cboe Volatility index , which measures implied volatility in the and is known as “Wall Street’s fear gauge,” was at 20.38 on Friday, compared to a high of 85.47 in March 2020.

Broader currency market volatility, as gauged by Deutsche Bank (DE:)’s vol measure, was also on a downtrend. It was 6.02 on Thursday late, which is a substantial drop from 14.17 in the aftermath of the pandemic.

On Friday, the ICE (NYSE) BofA MOVE Index which measures traders’ expectations about swings in Treasury markets, was 56.79, compared with 163.70 in mid-March 2013.

(Stocks, FX, bonds volatility – https://fingfx.thomsonreuters.com/gfx/mkt/byvrjlegdve/Vol%20indexes.PNG)