The IMF sees the global economy in a ‘synchronized downswing’ and financial markets need to act now to head off the growing risk, the Fund’s Financial Counselor Tobias Adrian says ahead of the launch of the Global Financial Stability Report (GFSR).
“Financial markets continue to be subject to the twists and turns of trade tensions. Economic activity has been weakening and downside risks have been intensifying,” he warned.
“In those uncertain conditions many central banks have adopted an easier stance of monetary policy. About 70 percent of the world's economies weighted by GDP have taken a more accommodative approach,” said Adrian.
That easier monetary stance has some repercussions on the debt markets.
“Investors now expect interest rates to remain very low for much longer. Remarkably, about 15 trillion of government and corporate bonds have negative yields. Markets expect that around 20 percent of advance economy government bonds will have negative yields until at least 2022,” he said.
Lower interest rates are forcing markets to look to riskier assets, Tobias suggested.
“With interest rates lower for longer, investors have been reaching for yield. That has caused asset surprises in some markets to become stretched and underwriting standards to deteriorate. In a serious downturn corporate debt at risk could rise to 19 trillion, or nearly 40 percent of all debt in major markets.”
The IMF continues to warn against eroding regulatory standards and protections put in place after the 2008 global financial crisis, and for governments to keep robust macroprudential policies.
“Vulnerabilities among nonbank financials are now elevated and 80 percent of economies as measured by GDP. The build-up of vulnerabilities seems worrisome. Policymakers need to take action now.”
A copy of the full report will be available at IMF.org/GFSR at 830 am ET Tuesday.