The International Monetary Fund (IMF) warned on Tuesday that apparent calm in global financial markets may mask significant vulnerabilities. Presenting the latest Global Financial Stability Report (GFSR), Tobias Adrian, who heads the IMF’s Monetary and Capital Markets Department, noted that after an April selloff tied to tariff news, equities rebounded strongly, major advanced-economy benchmarks are up about 10–15% year-to-date and emerging markets roughly twice that, while gold has rallied amid policy uncertainty.
“At this juncture, financial conditions are fairly easy across markets and across countries. Now, having said that, we see three vulnerabilities that we really highlight in the GFSR. The first one is that asset prices are stretched, so they are vulnerable to a readjustment in valuations. The second vulnerability is about the interaction with non-bank financial institutions. So, if asset prices were to adjust, that could impact non-banks, and could potentially lead to redemptions and further pressures on valuations. And then thirdly, longer term bond yields have risen in a number of countries in recent years, and some of that is reflective of fiscal concerns around the world, in many countries. And these fiscal concerns could then interact with banks and non-banks. So, our punchline in the Global Financial Stability Report, this time, is that while financial conditions are easy, the macro financial risks remain somewhat elevated,” said Adrian.
Emerging economies have regained some market access this year, helped by abundant global liquidity and a weaker U.S. dollar. But Jason Wu, Assistant Director, Monetary and Capital Markets Department at IMF, stressed that this more favorable environment should not lead to complacency.
“Frontier economies need to improve economic fundamentals. That includes both on the current account as well as fiscal buffers rebuilding, as our colleagues have mentioned in the previous session. Importantly, in the GFSR, we also have the chapter, this time, about strengthening bond market structure, so that frontier economies can obtain financing through domestic means rather than over relying on external funding. And these include, improving institutions’ quality, improve the predictability of issuance, and further develop debt markets in ways that will be conducive to channeled domestic savings towards governmental use,” explained Wu.
IMF officials underscored the importance of maintaining a stable regulatory environment, noting ongoing efforts to finalize Basel III – the post-crisis international banking standards – and preserving the resilience of the banking system. Central bank independence remains a key safeguard for monetary stability, while the rapid expansion of the stablecoin market, estimated at about $400 billion, is driving the development of clearer regulatory frameworks across major economies. These structural features exist against a backdrop of heightened uncertainty, which is also reflected in shifting demand for traditional safe-haven assets.
“We have seen the very strong appreciation of the dollar this year, and we think that that is in relation to overall uncertainty in the world. So, gold has always been a hedge asset, and there's certainly an increased amount of global uncertainty, policy uncertainty in many countries that that we observe. You know, in terms of benchmark, safe assets, we continue to view U.S. dollar bonds alongside a number of other benchmark bonds as key, safe asset benchmarks. And, you know that the depth and breadth of capital markets - of U.S. dollar assets - remain the very large and the deepest markets around the world,” said Adrian.
Even with the depth of U.S. markets anchoring global safe-haven demand, the IMF cautioned that fiscal financing pressures and monetary tightening across many economies could strain global bond markets over time.
“Looking just at the projected net supply going forward, given quantitative tightening of many central banks, and given the larger financing needs from fiscal policy, we may indeed see further pressure on those term premia in coming years,” Adrian concluded.
