Bond markets have been roiling in recent weeks, but the IMF doesn’t see that as a systemic threat, said Tobias Adrian, the Fund’s Economic Counselor said at the launch of the Global Financial Stability Report (GFSR) Tuesday (October 10) in Marrakech, Morocco.
“Financial conditions have tightened and that is better aligned with a tightening of monetary policy. So bond yields have risen, but in many ways that is a welcome tightening and very much in line with a tightening of monetary policy. So our overall financial stability assessment is one where we do see risks that continue to be skewed to the downside. However, the recent tightening of financial conditions has been orderly,” said Adrian, the head of the IMF’s Monetary and Capital Markets Department.
Central bank tightening seems to be bearing fruit, but the world is entering a period of divergence on monetary policy the report found.
“So our baseline advice to central banks is to hold the course to continue tightening when necessary, to hold steady where appropriate, and to cut where appropriate but always inline to get inflation back to target. We do not see at this point that the stance of monetary policy is directly interacting with financial stability or is putting financial stability at risk.” Adrian suggested.
Adrian said that buyers seem to be scarce for riskier bonds, but not outside of historical trends.
“The rise in yields has been quick, but we haven't seen sort of like forced deleveraging or other market dysfunction. Of course, with the rise of interest rate volatility, market liquidity has dried up to some degree. But again, that hasn't triggered forced deleveraging at this point. So in that sense, we we feel that it is orderly to date, and the rise in these bond yields is primarily driven by a rise in real-term premia.”
A copy of the full report is available at IMF.org/GFSR