## Global Financial Stability Report — May 2026 (Tokyo contribution)

## Source details

**Canonical URL:** [Global Financial Stability Report — May 2026 (Tokyo contribution)](https://www.imf.org/-/media/files/oap/oap-home/2026/gfsr-may2026-tokyo.pdf)

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- [Markdown version](/-/media/files/oap/oap-home/2026/gfsr-may2026-tokyo.pdf.md)
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### Market reaction and outlook
- The war in the Middle East elicited strong initial market reactions; futures and inflation expectations were monitored (Brent crude prices shown as June 2026 contract; market-implied inflation expectations are the average two-year breakeven inflation rates for Germany, Japan, the United Kingdom, and the United States).
- Markets have since become more sanguine with modest projected medium-term oil price rises shown by Brent oil futures (USD per barrel).
- Market commentary notes "Futures market indicating a modest rise in oil prices over the medium term" and that the market is "dominated by the ebb and flow of the U.S. president."
- Growth forecasting is characterized as difficult given the uncertainty (Source: IMF, World Economic Outlook April 2026).

### Salient financial stability risks (overview)
- The real economy differs markedly from market prices:
  - “Dated” prices of commodities significantly higher.
  - Refined product shortages intensifying (e.g., jet fuel).
  - Shipping and logistics starting to be affected.
  - Food and manufacturing depend on fertilizers and other products affected by the Strait’s closure.
  - Unlike tariffs, the war cannot be resolved by unilateral actions.
- Potential macroeconomic cascade: further supply shocks → more persistent inflationary pressures → higher inflation expectations → higher interest rates → lower growth.
- Four salient financial stability risks that could be triggered:
  1. Bond market fragilities.
  2. Emerging markets under pressure.
  3. High and concentrated asset valuations.
  4. Amplification channels through financial vulnerabilities.
- Financial stability risks are assessed as elevated.

### 1. Bond market fragilities
- Inflation pushed up monetary policy expectations and bond yields, causing rapid repricing in bonds that risks funding market stress and could expose sovereign–bank nexus.
- Key indicators and vulnerabilities shown:
  - Increase in bond yields (basis points, Feb 27 to May 1) illustrated.
  - Average maturity of newly issued debt (number of years) highlighted as a factor increasing rollover risk.
  - 30-year yield reaction on auction days (basis points, 90th percentile within indicated periods).
  - Repo spreads and usage of the Standing Repo Facility (percent; USD billions) suggest funding market stress potential.
  - Banking systems’ exposure to central government debt (percent) across 116 emerging markets.
- Critical statistic: "Half of these banking systems will become undercapitalized if debt haircut by 40 percent."

### 2. Emerging markets under pressure
- Capital flows and sovereign spreads:
  - Nonresident portfolio flows (USD billions, cumulative) show substantial capital outflows since the outbreak of war, with assets of weaker EMs sold off more.
  - Hard currency sovereign bond spread changes since February 27 (basis points) differ across energy importers (circle) and energy exporters (diamond).
- EMs’ market response to global risks has evolved (sources: BIS; Emerging Portfolio Fund Research; IMF, Balance of Payments Statistics; IMF staff calculations).
- Capital outflows are particularly sensitive to nonbank financial institutions (NBFIs); portfolio investment flows include portfolio debt and equity liability flows (with some data limitations for hedge funds in a specific panel).
- Cross-border flows into EMs during Fed tightening in 2022 are shown (percent of initial stock, cumulative), illustrating EM vulnerability to global financial tightening.

### 3. High and concentrated asset valuations
- Advanced equity markets show high valuations and high concentration:
  - Twelve-month-forward P/E ratios (multiples, actual P/E vs. modeled fair value) indicate elevated forward valuations.
  - Equity market concentration risk heat map uses Z-scores of the Herfindahl-Hirschman Index.
- Emerging market asset valuations have risen, especially sovereign and corporate spreads:
  - Emerging Market Risk Premiums Heat Map (Red = low risk premiums or higher valuation based on monthly data since 2015).
  - Model-implied fair value estimates of forward P/E use proxies for earnings growth, equity risk premium, and term premium.

### 4. Amplification channels through financial vulnerabilities
- Nonbank financial intermediation and cross-border links:
  - Share of cross-border claims on NBFIs domiciled in a given jurisdiction (percent) highlights that nearly half of global bank NBFI exposures (estimated at 13 percent of world GDP) are cross-border.
- Specific amplification mechanisms and indicators:
  - Options and leveraged ETFs: Index options trading volumes in U.S. equity markets (USD trillions) and leveraged equity ETFs’ assets and gross exposure (basis point of market capitalization) could amplify equity market volatility; exuberance—partly driven by retail investors—heightens risk.
  - Hedge funds: Relative value trades in the U.S. Treasury market (USD trillions) show hedge funds’ positions in fixed income have risen significantly; hedge funds tend to be flighty EM investors.
  - Private credit: The private credit market is noted as "$4 trillion"; direct lending default rates (percent) are deteriorating modestly and semi-liquid funds face redemption pressure. Time to liquidity gap for nontraded business development companies is presented; "Moderate shock" scenario considers redemptions capped at 5 percent and no additional collateralized or unsecured sources of liquidity.
  - Artificial Intelligence circularity: The AI ecosystem includes 73 public and private firms across several jurisdictions; firms involved in circular financing do not have weak balance sheets, but their investment activities impact weaker firms.
  - Concurrent sell-offs: During bear markets (identified as at least 5 percent cumulative downward correction within nonoverlapping windows, with window length no fewer than five consecutive trading days), stock and bond sell-offs have become more concurrent and larger in recent years. Distribution of S&P 500 and Treasury bond returns during bear market episodes is documented.

### Policy implications and recommended action
- Elevated financial stability risks require policymakers to act decisively.
- Areas for policy focus implied by the analysis:
  - Monitor and manage bond-market funding stress and sovereign–bank interconnectedness to limit undercapitalization risk (noting the 40 percent haircut threshold for half of the referenced banking systems).
  - Strengthen resilience in emerging markets to capital flow volatility, including attention to NBFI exposures and redemption dynamics.
  - Address valuation and concentration risks in advanced and emerging equity markets, and assess systemic implications of leveraged ETFs and options market exuberance.
  - Enhance oversight and contingency planning for private credit and semi-liquid funds given time-to-liquidity gaps and redemption sensitivities (example "Moderate shock" with 5 percent redemptions).
  - Consider cross-border channels of vulnerability stemming from NBFIs given nearly half of global bank NBFI exposures are cross-border and estimated at 13 percent of world GDP.

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_Source: https://www.imf.org/-/media/files/oap/oap-home/2026/gfsr-may2026-tokyo.pdf_