IMF Sees Financial Instability Risk Rising. Could Your Portfolio Hold a Time Bomb?


Risks to the stability of the global financial system are rising as the outlook for the world’s economy has deteriorated since the spring, the International Monetary Fund warned on Tuesday. One potential source of instability: mutual funds invested in less liquid parts of the market like high-yield and corporate bonds or emerging markets stocks and bonds.

Critical gauges of systemic risk—the kind that can spiral into financial crises—are beginning to pile up, according to the IMF’s latest global stability report. The IMF noted higher dollar funding costs and counterpart credit spreads as conditions worsened in recent weeks.

Liquidity is also deteriorating. “The ease and speed with which assets can be traded at a given price has deteriorated across some key asset classes due to volatile interest rates and asset prices,” writes Tobias Adrian, director of the IMF’s monetary and capital markets department in a blog post released on Tuesday as finance ministers and central bankers gather in Washington, D.C., for the IMF’s annual meetings.

How bad are things? Hotter-than-expected inflationary pressures, a worse-than-expected slowdown in China and more spillover from Russia’s invasion of Ukraine are contributing to what the IMF describes as a range of economic outcomes in the worst 20th percentile of situations in the last 40 years.

Possible trouble lies in governments laden with a mountain of debt but also nonbank financial institutions, including insurers, pension funds, hedge funds and mutual funds, the IMF said.

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