## CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY

## Source details

**Canonical URL:** [CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY](https://www.imf.org/-/media/files/publications/gfsr/2025/april/english/ch1.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/gfsr/2025/april/english/ch1.pdf.md)
- [Structured JSON version](/-/media/files/publications/gfsr/2025/april/english/ch1.pdf.json)

---

### Asset Prices, Volatility, and Inflation Expectations
- Stocks in the United States underperformed somewhat recently; a sell-off picked up in February and accelerated after April 2.
- Long-term yields:
  - Fell initially in response to the US imposing tariffs on April 2 amid ensuing market turbulence but have rebounded since.
- Market-implied inflation:
  - Market-implied expected inflation over the near- to medium-term in the United States remains meaningfully elevated.
- Implied volatility and uncertainty:
  - Latest level for VIX Index is as of April 15, 2025.
  - Economic policy uncertainty, trade policy uncertainty, and geopolitical risk indices are shown in percentiles since 1997; “Average Post Pandemic” is the average percentile since 2022.
- Timing and data:
  - Panels 1, 3, and 4 use weekly data and are updated as of April 9, 2025.

### Asset Valuation Pressures and Equity Dynamics
- Earnings and valuations:
  - Model-implied long-term rate of growth in earnings—backed out from a standard dividend discount model—has started to decline globally since February, after the United States began to roll out tariffs.
  - Implied earnings remain significantly higher for companies in the United States than those in other advanced economies or emerging markets.
- Equity risk premium (ERP) and valuations:
  - In the US stock market, the ERP has declined to historically compressed levels since the October 2024 Global Financial Stability Report.
  - ERPs in other jurisdictions are relatively less compressed and have displayed some decompression since the April 2 tariff announcements.

### Crypto Assets: Adoption, Performance, and Interconnectedness
- Bitcoin and related metrics:
  - Bitcoin has experienced strong performance, on net, since the October 2024 Global Financial Stability Report.
  - Stablecoin market capitalization has surpassed $200 billion.
  - Bitcoin exchange-traded products surpass $80 billion.
  - Bitcoin prices have fallen by over 25 percent from their peak at the beginning of the year.
- Risk-adjusted performance and spillovers:
  - Bitcoin’s risk-adjusted returns have significantly outperformed those for other asset classes since the October 2024 GFSR.
  - Ownership distribution of the five main ETFs highlights broad-based adoption among retail and institutional investors.
  - Spillovers: shocks originating in the stock market appear to spill over to Bitcoin to a higher degree than the other way around; Bitcoin spillovers into the S&P 500 have been muted.
- Methods:
  - Spillover analysis based on Diebold and Yilmaz (2012) and Iyer and Popescu (2023) using a lag-2 VAR with a 52-week rolling window and a 10-week forecast horizon.

### Financial Stability Risks and Growth-at-Risk
- Financial conditions:
  - The tightening seen in global financial conditions since the October 2024 Global Financial Stability Report has accelerated notably in recent weeks amid turbulence following the April 2 tariffs.
  - Most advanced-economy jurisdictions with lofty equity valuations and tight corporate credit spreads saw sharp sell-offs and spikes in volatility.
  - Tightening in financial conditions in emerging markets excluding China appears relatively contained due to relatively stable currencies.
- Growth-at-Risk (GaR) updates:
  - IMF’s updated GaR forecasts that downside risks over the near-term have risen significantly—one-year-ahead global growth is forecast to fall below 0.4 percent with a 5 percent chance (blue dot in Figure 1.5, panel 1).
  - This GaR metric deteriorated from around 1.2 percent as of the October 2024 Global Financial Stability Report (red dot), and is now around the 30th historical percentile.
  - The balance of risks to global growth over 2025 continues to be skewed to the downside.
- Three key vulnerabilities supporting the top-down GaR assessment:
  - Further correction of asset prices.
  - Potential strains impacting highly leveraged nonbank financial institutions (NBFIs).
  - Turbulence in sovereign bond markets.

### Financial Institutions: Profitability, Vulnerabilities, and Trade Finance Risks
- Bank sector performance and drivers (2024):
  - Widening net interest margins and, for larger banks, strong results from asset management, advisory, and trading services expanded revenues.
  - Asset quality improved, boosting profitability and valuations, particularly for European banks.
- Risks from the trade shock and policy responses:
  - Loan loss provisions: reduction in provisions was a substantial driver of return on assets; a deteriorating macrofinancial scenario could reverse this trend and increase credit costs.
  - Net interest margins: recent widening contributed disproportionately to profitability gains; a downward revision in policy rate trajectories observed after the tariff announcement will weigh on net interest margins.
  - Noninterest income: elevated uncertainty is expected to slow capital markets and advisory activities, reducing noninterest income.
  - Trade finance disruption:
    - Trade finance supports over $10 trillion in annual transactions.
    - Trade finance generates $18 billion of bank revenues globally.
    - Tariffs can make cash flows less predictable, prompting larger trade credit facilities, tightening lending criteria, and increasing underwriting costs.
  - US dollar funding pressures for internationally active non-US banks may increase amid elevated volatility and geopolitical events.
- Monitoring and vulnerabilities:
  - These risks contribute to keeping a relatively large number of banks on the IMF’s monitoring list of weaker banks.

---

### 1. Growth Forecast Probability Density

### Growth forecast and market-triggered risks
- Density for year 2025: at 2025:Q1 (figure label present in source).
- One-Year-Ahead Growth-at-Risk Forecast:
  - Historical percentile rank; 5th percentiles; density for year 2025: at 2024:Q3 (figure labels present in source).
- Sharp decline in banks valuation after April 2 tariffs announcement highlights challenges ahead.
- The tariff announcement headwinds keep the IMF’s monitoring list of weak banks relatively large.

### Risk-weighted assets (RWA) densities and bank capital adequacy
- Banks’ average risk weight (RWA density) shows wide variation across internationally active banks.
- Basel Committee finding: capital requirements based on risk parameters estimated by banks for exactly the same set of exposures could differ by more than 20 percent (BCBS 2013, 2016).
- The density of RWAs in GSIBs has declined 12 percent over the past five years.
- RWA densities declined even for banks using standardized approaches; trend reversed for standardized approach banks as supporting measures were unwound but continued to decline among banks using internal models.
- The Basel Committee developed policies including an output floor, but these measures have not been implemented in several jurisdictions.

### Banks–NBFI linkages and contagion risk
- In the United States, banks’ loans and commitments to NBFIs increased from about 6 percent of total loans and commitments in 2010 to about 16 percent, equivalent to almost 120 percent of bank regulatory capital, as of the third quarter of 2024.
- Hedge funds rely on banks, particularly GSIBs, for more than 50 percent of their total funding and have rapidly increased the total dollar amount of their borrowing from banks.
- Margin calls by banks on hedge fund clients can mitigate banks’ exposures but may force unwinding of positions that could become disorderly; margin calls can fail, exposing banks to credit losses.

### Private credit funds and cross-border amplification of shocks
- Identified portion of bank exposures to private credit vehicles globally exceeds $500 billion (Moody’s Investors Service 2024a).
- Total bank exposure likely exceeds 25 percent of total assets under management in private credit funds.
- Direct lenders often depend on revolving credit lines from banks; revolving debt facilities to BDCs have been increasing with volatile utilization rates.
- Internationalization of direct-lending ecosystems may lead to abrupt halts of financing in smaller countries during prolonged risk-off episodes.

### NBFI leverage, market functioning, and asset managers’ derivatives use
- Market turmoil after the April 2 tariff announcement exposed vulnerabilities from elevated use of leverage by some NBFIs; Treasury selling by leveraged NBFIs in response to margin calls may have amplified moves, similar to the March 2020 dash-for-cash episode.
- US mutual funds account for about half of the net long positions in two- and five-year Treasury futures contracts.
- Futures use can amplify adverse shocks and increase liquidity risk from margin calls.

---

### 1. Net Treasury and Equity Futures Positions

### Asset managers’ demand for long Treasury futures and drivers
- Asset managers take larger net long positions in two- and five-year Treasury futures when more central bank rate cuts are priced in.
- Positions in 10-year contracts appear correlated with the steepness of the curve in the 2- to 10-year segment.
- Statistical associations shown:
  - R2 = 0.34 (panel 2 association)
  - R2 = 0.4829 (panel 2 association)
  - R2 = 0.6176 (panel 3 association)

### Financial stability implications of asset managers’ long futures demand
- Asset managers’ demand for long Treasury futures creates arbitrage opportunities that attract leveraged investors to take short futures positions and repo-financed Treasury holdings.
- Vulnerabilities:
  - A sudden increase in Treasury market volatility could lead to higher margin requirements.
  - A rise in the repo rate could make leveraged basis trades unprofitable.
  - Either development can potentially trigger a disorderly unwind of the trade.
- The chapter notes an unwind reportedly happened to an extent after the April 2 tariff announcement; persistence and magnitude remained uncertain at the report’s cut-off date.

### Hedge funds’ leverage and exposures
- Assets under management of leveraged hedge funds have doubled over the past decade.
- Reported leverage by strategy (gross notional exposure relative to asset values):
  - Macro strategies: 40 times asset values.
  - Relative-value fixed-income strategies: 25 times asset values.
  - Multistrategy hedge funds: more than 15 times asset values.
- In a representative sample of global hedge funds, as of the first quarter of 2024:
  - Interest rate derivatives accounted for almost half of the total gross notional exposure of derivatives and repurchase agreements.
  - The same sample owned $1.6 trillion in Treasury bonds and were short an additional $1.3 trillion in the same instrument.
- External estimates:
  - US Securities and Exchange Commission estimated $8 trillion in interest rate derivative exposures as of the first quarter of 2024.
  - An IOSCO survey reported hedge funds held more than $25 trillion in interest rate derivatives as of the end of 2022.

### Emerging and frontier markets: external headwinds and resilience
- Emerging market capital outflows could reach 1.6 percent of GDP over the next year with a 5 percent chance.
- In a scenario where the broad dollar index rises and US equities sell off further, the tail outcome could worsen to 1.9 percent of GDP.
- Nonresident participation in local currency bond markets (LCBMs) has declined since 2018.
- LCBM growth has outpaced nonresident investment, reducing foreign share despite market size growth.
- Frontier economies:
  - Frontier issuance was robust in the first quarter as spreads compressed and financial conditions eased.
  - The share of frontier sovereigns with yields above 10 percent rose from 10 percent to almost 30 percent in April.
  - Total issuance in the first quarter of the year amounted to roughly half of (figure context truncated in source).

---

### 2. Private Nonfinancial Credit to GDP

### Credit gaps and leverage in emerging markets
- Credit gaps for private nonfinancial credit to GDP are calculated by averaging three methodologies: Hodrick-Prescott, Christiano-Fitzgerald and five-year moving average; latest data are from the third quarter of 2024.
- Panel coverage: an unbalanced sample of 97 emerging market sovereigns is used for rating-change counts (six-month sum of rating changes), using the average of Moody’s, S&P, and Fitch where available.

### Emerging markets — sovereign financing and private sector risks
- Positive sovereign ratings momentum has accelerated in recent periods (six-month sum of rating changes across 97 EMs).
- Interest expenses have increased substantially in recent years; changes in gross financing needs and interest expense since 2017–19 are reported in percent of GDP by region.
- Markets increasingly expect major emerging markets to ease rates in response to weaker growth.
- Ex ante real policy rates remain relatively high compared with the past decade.

### China — rising risks to falling prices
- China’s outlook is highly uncertain amid tightening external financial conditions and rounds of retaliatory tariffs and countermeasures with the United States.
- Analysts’ forecasts of one-year-ahead headline inflation dropped below 1 percent.
- Term premium on 10-year government bonds has dropped to a record low.
- Repo and liquidity risks:
  - Overnight and seven-day tenors account for nearly 90 percent of repo transactions.
- Policy implications for China:
  - Accommodative macroeconomic policies along with structural and pro-market reforms are urgently needed.
  - Regulatory implications: additional measures to prevent excessive concentration of bond holdings, enhance liquidity and maturity risk management, and close regulatory and data gaps.

### Sovereign bond market functioning and supply pressures
- United States:
  - Market expectations suggest stabilization of persistent fiscal deficits at 6.5–7 percent of GDP.
  - 40 percent of maturing debt is concentrated in the first quarter of 2025.
  - On January 2, 2025, the debt ceiling became binding again; the current ceiling is set at $36.1 trillion and has been reached.
- Euro area:
  - Net issuance of government bonds set to ratchet up, driven by financing higher defense and infrastructure spending.
  - A relaxation of Germany’s “debt brake” has prompted concerns about potential increase in government debt issuance.

### Constraints on dealer balance sheets and market fragility
- Treasury market size is now five times dealers’ balance sheets, up from one-and-a-half times around 20 years ago.
- Intermediation capacity of US primary dealers was pushed toward its limit following heightened volatility after the April 2 tariff announcements.
- Spreads on repurchase agreements have become more sensitive to the quantity of Treasury issuance.

---

### 3. Germany’s Net Issuance Volume versus Swap Spreads

### Dealer balance sheets, intermediation capacity, and market liquidity
- Swap spread declines during the recent sell-off reflected pressure on dealer balance sheets amid broad deleveraging.
- Dealer capacity utilization proxied by normalized net primary dealer positions in Treasuries and agency MBS, scaled between 0 and 1 relative to in-sample peaks (January 2010 to March 2025).
- Residual illiquidity measures market-value-weighted spline fitting errors of Treasury yields unexplained by interest rate volatility as captured by the MOVE index.

### Shift in dealer business toward higher-margin activities and collateral implications
- Dealers increasingly used balance sheets to provide equity margin loans to hedge funds and other clients.
- Only 11 percent of the turnover in global FX derivatives is denominated in emerging market currencies.
- Expansion of options market-making activity—partly driven by retail speculative positioning—has shifted dealers’ focus away from core markets like government bonds.

### Cross-border funding, euro area banks, and dollar reliance
- ECB quantitative tightening raised funding costs for euro area banks and drove them to tap US repo markets—borrowing dollars against Treasury collateral and swapping proceeds back into euros.
- Policy implication: Elevated fragility of cross-border dollar liquidity underscores the importance of globally coordinated backstops—such as standing repo facilities and central bank swap lines.

### Corporate and household vulnerabilities related to trade uncertainty
- Corporate sector:
  - Corporate cash flows remained healthy and balance sheets resilient in aggregate since the October 2024 GFSR, but corporate bond spreads have widened recently.
  - Currently, 12 percent of advanced economy corporates have interest coverage ratios (ICRs) below 1; this share is 18 percent for emerging market corporate firms outside China.
  - Scenario analysis:
    - Progressive worsening: share of debt with poor serviceability could reach 1.5 to 2 times levels in 2023.
    - For emerging market corporates, an initial 50 basis point compression in profit margins combined with an equivalent increase in effective interest rates could raise the share of debt with poor serviceability by 6 percentage points.
    - Under a 200 basis point impact on profit margins and interest rates, that share could increase by 17 percent.
  - More than 70 percent of bonds issued by firms in major Latin American countries since 2020 denominated in dollars; corresponding share for emerging markets excluding China averages around 47 percent.
- Households:
  - Cash buffers (cash and cash equivalents as a percentage of total financial liabilities) have declined to below prepandemic levels in both advanced and emerging market economies by 2023.
  - IMF staff estimates: a 1 percentage point increase in the debt-service ratio is associated with a gradual rise in household delinquency rates in subsequent quarters.
  - Data point: 83 percent of US mortgage holders have an interest rate below 6 percent, a decrease from the mid-2022 peak of about 93 percent.

---

### 5.6 percentage points to 18 percent.

### The Direct Lending Segment of Corporate Credit — Mixed Prospects
- Leveraged finance instruments include broadly syndicated loans (BSLs) and direct lending (DL).
- DL credit quality:
  - DL default rates broadly in line with other measures of credit distress.
  - Nearly half of DL borrowers had negative free operating cash flows (FOCF) even before the tariff-related market turmoil.
  - Health care services and software sectors: 20 and 27 percent, respectively, of DL borrowers in these sectors had S&P credit estimates in the “ccc” category (S&P Global Ratings 2024b).
- Market pressures:
  - Rising uncertainty after April 2 drove up spreads on new deals and reduced expected deal flow.
  - Concerns that deterioration in borrower credit quality may not be reflected in stale valuation practices.
- Structural features raising risk:
  - High usage of payment-in-kind (PIK) provisions and amend-and-extend restructurings.

### Household Sector Vulnerabilities — Elevated Equity Holdings and Debt-Service Pressure
- Household assets grew rapidly since the end of the pandemic; households now hold more stocks as a share of financial assets than in 2019.
- US households’ stock holdings reached a record high by the end of 2024.
- Vulnerabilities from market corrections:
  - Increased stock exposure makes households more vulnerable to prolonged declines in stock prices.
- Housing and debt servicing:
  - Global real home prices have declined gradually and modestly from pandemic highs; US home prices remained elevated.
  - Delinquency rates for fixed-rate mortgages remain low, but delinquency rates have increased notably for variable-rate auto loans and credit card debt over the past couple of years.

### Commercial Real Estate (CRE) — Stabilization Signs but Headwinds Persist
- Total CRE returns were 1.3 percent in the fourth quarter of 2024.
- Office sector values in North America declined by 12.3 percent year over year.
- Estimated $660 billion in commercial and multifamily real estate mortgages in the United States due for payoff in 2025.
- About $3.2 trillion in CRE debt maturing between 2025 and 2029.
- Nearly 30 percent of office loans maturing in 2025 (about $30 billion) may be subject to negative equity.
- 61 percent of US loans that matured in 2024 were actually paid off, compared with 78 percent over the previous decade.
- Fourth quarter of 2024 overall CRE loan default rate in the United States: about 1.57 percent.
- US banks’ net charge-offs on CRE loans rose in 2024 to 0.26 percent at the end of 2024.

### Policy recommendations and supervisory actions (selected)
- Market infrastructure and crisis preparedness:
  - Ensure market functioning via preparedness to access central bank liquidity facilities and readiness to intervene early to address severe liquidity or market functioning stress.
  - Liquidity can be provided to nonbanks with appropriate guardrails.
  - Require financial institutions to test access to central bank instruments periodically.
  - Implement recovery and resolution frameworks for weak or failing financial institutions.
- Monetary policy guidance:
  - Where growth and inflation momentum are set to continue slowing, central banks should gradually ease monetary policy toward a more neutral stance.
  - Where inflation remains stubbornly above targets, central banks should maintain a restrictive stance and affirm commitment to bringing inflation back to targets.
- Bank and NBFI supervision:
  - Ensure sufficient capital and liquidity; continue full, timely, and consistent implementation of Basel III.
  - Provide better-resourced, independent, intensive, and conclusive supervision; continue stress-testing banks’ exposures.
  - Strengthen policies to mitigate vulnerabilities and shock amplification from nonbank leverage.
- Macroprudential and fiscal policy:
  - Strengthen micro and macroprudential frameworks; where buffers are insufficient, tighten macroprudential tools while avoiding broad tightening of financial conditions.
  - Where downturn-induced financial stress occurs, consider releasing macroprudential buffers to help banks absorb losses and support credit provision.
  - Fiscal adjustments should focus on credible and growth-friendly rebuilding of buffers given gross sovereign financing needs expected to remain above prepandemic averages.
- Crypto asset risks:
  - Safeguard monetary sovereignty and strengthen monetary policy frameworks.
  - Adopt unambiguous tax treatment of crypto assets.
  - Monitor crypto projects that may fall under existing banking or securities regulations and supervise activities to address vulnerabilities.

---

### Box 1.2. Lower Bond Yields Are Exerting Pressure on Chinese Insurers

### Key findings: yields, valuations, and solvency
- Chinese life insurers are under pressure from lower yields on their investments.
- Insurers’ valuations (equity prices) show weaker performance relative to insurers in other major jurisdictions.
- Solvency ratios for Chinese life insurers have deteriorated.
- Liquidity has improved as insurers reduced the share of alternative and illiquid investments in their portfolios.

### Evidence and data scope
- Calculations based on a sample of six listed life insurers or insurance groups in China:
  - China Life Insurance Company
  - China Pacific Insurance Group
  - China Taiping Insurance Holdings Company
  - New China Life Insurance Company
  - Ping An Insurance (Group) Company of China
  - The People‘s Insurance Company (Group) of China
- Sources: Bloomberg Finance L.P.; China National Financial Regulatory Administration; Moody’s Investors Service; S&P Capital IQ Pro; and IMF staff calculations.

---

*CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY (PDF).*

### CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY

### CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY

### Asset Prices, Volatility, and Inflation Expectations
- Stocks in the United States have underperformed somewhat recently after years of outperformance; a sell-off picked up in February and accelerated after April 2.
- Long-term yields:
  - Long-term yields fell initially in response to the US imposing tariffs on April 2 amid ensuing market turbulence but have rebounded since.
- Market-implied inflation: market-implied expected inflation over the near- to medium-term in the United States remains meaningfully elevated.
- Implied volatility and uncertainty:
  - Latest level for VIX Index is as of April 15, 2025.
  - Economic policy uncertainty, trade policy uncertainty, and geopolitical risk indices are shown in percentiles since 1997; “Average Post Pandemic” is the average percentile since 2022.

### Asset Valuation Pressures and Equity Dynamics
- Earnings and valuations:
  - Model-implied long-term rate of growth in earnings—backed out from a standard dividend discount model—has started to decline globally since February, after the United States began to roll out tariffs.
  - Implied earnings remain significantly higher for companies in the United States than those in other advanced economies or emerging markets.
- Equity risk premium (ERP) and valuations:
  - In the US stock market, the ERP has declined to historically compressed levels since the October 2024 Global Financial Stability Report, indicating very high investor appetite for US stocks and further deviation of stock prices from fundamentals.
  - ERPs in other jurisdictions are relatively less compressed and have displayed some decompression since the April 2 tariff announcements.
- Timing and data:
  - Panels 1, 3, and 4 use weekly data and are updated as of April 9, 2025.

### Crypto Assets: Adoption, Performance, and Interconnectedness
- Bitcoin and related metrics:
  - Bitcoin has experienced strong performance, on net, since the October 2024 Global Financial Stability Report.
  - The market capitalization of stablecoins has surpassed $200 billion.
  - Another wave of inflows into Bitcoin exchange-traded products has accompanied price gains; those assets now surpass $80 billion.
  - Bitcoin prices have fallen by over 25 percent from their peak at the beginning of the year, indicating sensitivity to pressures in other asset prices.
- Risk-adjusted performance and spillovers:
  - Bitcoin’s risk-adjusted returns have significantly outperformed those for other asset classes since the October 2024 GFSR.
  - Ownership distribution of the five main ETFs highlights broad-based adoption among retail and institutional investors.
  - Spillovers: shocks originating in the stock market appear to spill over to Bitcoin to a higher degree than the other way around; Bitcoin spillovers into the S&P 500 have been muted.
- Methods:
  - Spillover analysis is based on Diebold and Yilmaz (2012) and Iyer and Popescu (2023) using a lag-2 VAR with a 52-week rolling window and a 10-week forecast horizon.

### Financial Stability Risks and Growth-at-Risk
- Financial conditions:
  - The tightening seen in global financial conditions since the October 2024 Global Financial Stability Report has accelerated notably in recent weeks amid turbulence following the April 2 tariffs.
  - Most advanced-economy jurisdictions with lofty equity valuations and tight corporate credit spreads saw sharp sell-offs and spikes in volatility, abruptly tightening financial conditions.
  - Tightening in financial conditions in emerging markets excluding China appears relatively contained due to relatively stable currencies.
- Growth-at-Risk (GaR) updates and downside risks:
  - The IMF’s updated GaR forecasts that downside risks over the near-term have risen significantly—one-year-ahead global growth is forecast to fall below 0.4 percent with a 5 percent chance (blue dot in Figure 1.5, panel 1).
  - This Growth-at-Risk metric has deteriorated from around 1.2 percent as of the October 2024 Global Financial Stability Report (red dot), and is now around the 30th historical percentile.
  - The balance of risks to global growth over 2025 continues to be skewed to the downside.
- Three key vulnerabilities supporting the top-down GaR assessment:
  - Further correction of asset prices.
  - Potential strains impacting highly leveraged nonbank financial institutions (NBFIs).
  - Turbulence in sovereign bond markets.

### Financial Institutions: Profitability, Vulnerabilities, and Trade Finance Risks
- Bank sector performance and drivers:
  - In 2024, widening net interest margins and, for larger banks, strong results from asset management, advisory, and trading services expanded revenues.
  - Lackluster but stable global growth did not materially increase the cost of credit; asset quality improved, boosting profitability and valuations, particularly for European banks.
- Risks from the trade shock and policy responses:
  - The sustainability of improved bank profitability is in balance because cyclical factors supporting profitability could be reversed by the trade shock.
  - Key channels through which tariffs and heightened uncertainty could weaken banks:
    - Loan loss provisions: reduction in provisions has been a substantial driver of return on assets; a deteriorating macrofinancial scenario could reverse this trend and increase credit costs.
    - Net interest margins: recent widening contributed disproportionately to profitability gains; a downward revision in policy rate trajectories observed after the tariff announcement will weigh on net interest margins and reduce revenues.
    - Noninterest income: elevated uncertainty is expected to slow capital markets and advisory activities, reducing noninterest income.
    - Trade finance disruption:
      - Trade finance supports over $10 trillion in annual transactions.
      - Trade finance generates $18 billion of bank revenues globally.
      - Tariffs can disrupt trade finance by making cash flows less predictable, prompting larger trade credit facilities, tightening lending criteria, and increasing underwriting costs.
    - US dollar funding pressures for internationally active non-US banks may increase amid elevated volatility and geopolitical events.
- Monitoring and vulnerabilities:
  - These risks contribute to keeping a relatively large number of banks on the IMF’s monitoring list of weaker banks.

*Italicized source attribution: CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY (PDF).*

### 1. Growth Forecast Probability Density

### ch1 - 1. Growth Forecast Probability Density

### Growth forecast and market-triggered risks
- Density for year 2025: at 2025:Q1 (figure label present in source).
- One-Year-Ahead Growth-at-Risk Forecast (Historical percentile rank; 5th percentiles; density for year 2025: at 2024:Q3) (figure labels present in source).
- Sharp decline in banks valuation after April 2 tariffs announcement highlights challenges ahead.
- The headwinds created by the tariff announcement keep the IMF’s monitoring list of weak banks relatively large.

### Risk-weighted assets (RWA) densities and bank capital adequacy
- Banks’ average risk weight (RWA density) is intended to reflect risk associated with exposures and activities; wide variation observed across internationally active banks, even among banks with broadly comparable business models and overall risk profiles.
- Basel Committee finding: capital requirements based on risk parameters estimated by banks for exactly the same set of exposures could differ by more than 20 percent (BCBS 2013, 2016).
- The density of risk-weighted assets in global systemically important banks (GSIBs) has declined 12 percent over the past five years.
- Changes in banks’ portfolios explain part of the decline, including increased use of synthetic risk transfers and the effect of public guarantees during the COVID pandemic.
- RWA densities declined even for banks using standardized approaches; as supporting measures were unwound, the downward trend reversed for banks using the standardized approach but continued to decline among banks using internal models.
- Average RWA densities estimated using internal models show substantial variation even within asset types.
- The Basel Committee developed policies to address unwarranted variability of risk weights, including an output floor, but these measures have not been implemented in several jurisdictions.

### Banks–NBFI linkages and contagion risk
- Over the last decade, nonbank financial intermediaries (NBFIs), particularly investment funds (mutual funds, hedge funds, private equity and credit funds), have gradually gained a share of global financial system assets from banks, insurers, and pension funds.
- In the United States, banks’ loans and commitments to NBFIs increased from about 6 percent of total loans and commitments in 2010 to about 16 percent, equivalent to almost 120 percent of bank regulatory capital, as of the third quarter of 2024.
- Some types of NBFIs are highly reliant on bank funding; hedge funds rely on banks, particularly GSIBs, for more than 50 percent of their total funding and have rapidly increased the total dollar amount of their borrowing from banks.
- Margin calls by banks on hedge fund clients following equity and oil price declines can mitigate banks’ exposures but may force unwinding of positions that could become disorderly; margin calls can fail, exposing banks to credit losses.
- While the tariff turmoil’s contagion seems limited so far, it highlights potential risks from interconnectedness.

### Private credit funds and cross-border amplification of shocks
- Companies are increasingly obtaining financing from private credit funds alongside traditional intermediaries.
- Private credit funds rely on financing including subscription credit facilities and asset-based lending provided by international bank syndications; large, foreign banks play a crucial role in financing the US private credit ecosystem.
- The identified portion of bank exposures to private credit vehicles globally exceeds $500 billion (Moody’s Investors Service 2024a), and total bank exposure likely exceeds 25 percent of total assets under management in private credit funds.
- Direct lenders often depend on revolving credit lines from banks to manage liquidity and unexpected outflows; revolving debt facilities to business development companies (BDCs) have been increasing with volatile utilization rates.
- Pension funds are increasing investments in foreign direct-lending funds; direct-lending funds increasingly extend credit to foreign borrowers.
- The internationalization of direct-lending ecosystems can aid credit development but may lead to abrupt halts of financing in smaller countries during prolonged risk-off episodes, increasing the risk that credit shocks propagate across jurisdictions and underscoring the need for cross-border supervisory coordination.

### NBFI leverage, market functioning, and asset managers’ derivatives use
- Market turmoil after the April 2 tariff announcement exposed vulnerabilities from elevated use of leverage by some NBFIs; Treasury selling by leveraged NBFIs in response to margin calls may have amplified moves, similar in nature to the March 2020 dash-for-cash episode.
- Asset managers have significantly expanded use of leveraged positions via long futures positions in Treasuries and US equities.
- Futures contracts provide synthetic leverage and operational advantages (deep liquid market; favorable reporting treatment); futures use can amplify adverse shocks and increase liquidity risk from margin calls.
- Data from the US Securities and Exchange Commission show that US mutual funds account for about half of the net long positions in two- and five-year Treasury futures contracts.
- Some asset managers use futures rather than outright Treasury holdings to extend duration while tilting portfolios toward corporate credit, potentially improving risk-adjusted returns but increasing systemic liquidity and margin-related risks.

*Source: ch1 - 1. Growth Forecast Probability Density (chapter text provided).*

### 1. Net Treasury and Equity Futures Positions

### 1. Net Treasury and Equity Futures Positions

### Asset managers’ demand for long Treasury futures and drivers
- Asset managers use futures contracts to express directional views and take larger net long positions in two- and five-year Treasury futures when more central bank rate cuts are priced in (Figure 1.11, panel 2).
- Positions in 10-year contracts appear correlated with the steepness of the curve in the 2- to 10-year segment (Figure 1.11, panel 3), sometimes taken to be indicative of the economy’s business cycle phase.
- Trade-off illustrated: duration versus Sharpe ratio (Figure 1.11, panel 1).
- Statistical associations shown in the chapter:
  - R2 = 0.34 (panel 2 association)
  - R2 = 0.4829 (panel 2 association)
  - R2 = 0.6176 (panel 3 association)

### Financial stability implications of asset managers’ long futures demand
- Asset managers’ demand for long Treasury futures creates arbitrage opportunities that attract leveraged investors, including hedge funds, who assume a large part of the correspondent short futures positions and combine these with repo-financed holdings of Treasury bonds in leveraged basis trades.
- Vulnerabilities described:
  - A sudden increase in Treasury market volatility could lead to higher margin requirements.
  - A rise in the repo rate could make leveraged basis trades unprofitable.
  - Either development can potentially trigger a disorderly unwind of the trade.
- The chapter notes an unwind reportedly happened to an extent in the period after the April 2 tariff announcement, but the persistence and magnitude remained uncertain at the report’s cut-off date.

### Hedge funds’ leverage and exposures
- Assets under management of leveraged hedge funds have doubled over the past decade (Figure 1.12, panel 1).
- Aggregate gross notional exposure of hedge funds has increased across major strategies; the average ratio of gross notional exposure to assets has more than doubled over the past decade (black line in Figure 1.12, panel 2).
- Reported leverage by strategy (gross notional exposure relative to asset values):
  - Macro strategies: 40 times their asset values.
  - Relative-value fixed-income strategies: 25 times their asset values.
  - Multistrategy hedge funds: more than 15 times their asset values.
- In a representative sample of global hedge funds, as of the first quarter of 2024:
  - Interest rate derivatives accounted for almost half of the total gross notional exposure of derivatives and repurchase agreements (Figure 1.12, panel 3).
  - The same sample owned $1.6 trillion in Treasury bonds and were short an additional $1.3 trillion in the same instrument.
- External estimates:
  - US Securities and Exchange Commission estimated $8 trillion in interest rate derivative exposures as of the first quarter of 2024 (noting this is based on qualifying funds reporting to the commission and therefore underestimates global exposure).
  - An International Organization of Securities Commissions survey reported hedge funds held more than $25 trillion in interest rate derivatives as of the end of 2022.
- Mechanisms of vulnerability:
  - Hedge funds use derivatives and repurchase agreements to obtain leverage.
  - A spike in repo rates or Treasury market volatility can render basis trades unprofitable and produce margin calls and rapid deleveraging, potentially leading to forced selling of Treasury securities and brisk unwinding of futures positions (March 2020 example cited).

### Emerging and frontier markets: external headwinds and resilience
- The escalation of global trade tensions, including the April 2 tariffs announcements, has significantly impacted emerging market assets by reducing trade volumes and increasing uncertainty.
- Observed effects and metrics:
  - Emerging market equities retreated in early April with large volatility posted by major local indices (Figure 1.13, panel 1).
  - Emerging market bond funds have seen persistent outflows in recent years (Figure 1.13, panel 2).
  - Expected risk-adjusted returns on carry trades involving emerging market currencies have fallen (Figure 1.13, panel 3) as market-implied foreign exchange rate volatility increased and emerging market interest rates declined.
- Capital flows at risk assessment:
  - Emerging market capital outflows could reach 1.6 percent of GDP over the next year with a 5 percent chance.
  - In a scenario where the broad dollar index rises and US equities sell off further, the tail outcome could worsen to 1.9 percent of GDP (Figure 1.13, panel 4).
- Sovereign and private sector conditions:
  - On aggregate, emerging markets’ sovereign credit ratings showed positive momentum over the last year after a long period of downgrades following the pandemic (Figure 1.14, panel 1).
  - Private nonfinancial sector leverage and averaged estimates of credit gaps do not clearly signal overheating in most large emerging market economies (Figure 1.14, panels 2 and 3).
  - Forecasts indicate future gross financing needs are expected to remain above prepandemic averages in most emerging markets, with more government revenue spent on interest payments (Figure 1.14, panel 4).
  - Expectations of weaker growth have led to expectations that monetary policy rates will decline toward their terminal rates (Figure 1.14, panel 5), although real interest rates are still around their highest levels over the past decade (Figure 1.14, panel 6).
- Longer-term demand for emerging market assets:
  - Nonresident participation in local currency bond markets (LCBMs) has declined since 2018 (Figure 1.15, panel 1).
  - LCBM growth has outpaced nonresident investment, reducing foreign share despite market size growth (Figure 1.15, panel 2).
  - LCBMs have exhibited lackluster 10-year cumulative returns and high realized volatility versus other fixed-income assets, providing among the lowest Sharpe ratios (Figure 1.15, panel 3).
  - Emerging market currencies appreciated against the dollar in only 2 out of the past 10 years, contributing to weak LCBM performance (Figure 1.15, panel 4).
- Frontier and low-income economies:
  - Before the April 2 tariffs-driven turmoil, frontier economies’ market conditions had been improving since the October GFSR, but yields remained high for many countries, increasing refinancing risks as significant debt matures in coming quarters.
  - The recent rise in spreads and tightening financial conditions exacerbate challenges for frontier economies and low-income countries, especially if official development assistance is cut back, potentially increasing reliance on private markets for debt financing.
  - Sovereign eurobond spreads for frontier economies narrowed in 2024 and early 2025 due to macrofinancial reforms, debt restructuring progress, and credit rating upgrades in several countries; total issuance in the first quarter of the year amounted to roughly half of (figure context truncated in source).

*International Monetary Fund | April 2025*

### 2. Private Nonnancial Credit to GDP

### 2. Private Nonnancial Credit to GDP

### Credit gaps and leverage in emerging markets
- Credit gaps for private nonfinancial credit to GDP are calculated by averaging three methodologies: Hodrick-Prescott, Christiano-Fitzgerald and five-year moving average; latest data are from the third quarter of 2024.
- The methodologies measure the difference between the ratio of private nonfinancial credit to GDP and its longer-term trend.
- Panel coverage: an unbalanced sample of 97 emerging market sovereigns is used for rating-change counts (six-month sum of rating changes), using the average of Moody’s, S&P, and Fitch where available.

### Emerging markets — sovereign financing and private sector risks
- Positive sovereign ratings momentum has accelerated in recent periods (six-month sum of rating changes across 97 EMs).
- Interest expenses have increased substantially in recent years; change in gross financing needs and interest expense since 2017–19 are reported in percent of GDP by region (ASIACEEMEA, LATAM).
- Markets increasingly expect major emerging markets to ease rates in response to weaker growth; panel shows change in policy rate and distance from terminal rate expectations (Percent).
- Ex ante real policy rates remain relatively high compared with the past decade; normalized ex-ante real policy rates computed from the difference between policy rate and analysts’ consensus inflation forecasts for 6 months ahead (Z-score).
- Data labels use ISO country codes; CEEMEA includes Hungary, Poland, Romania, and South Africa. EM = emerging market; LATAM = Latin America.

### Key statistics and country observations
- Credit gap latest data: third quarter of 2024 (three-method average).
- Sample: 97 emerging market sovereigns for rating-change panel.
- Panel 5 terminal policy rates derived from market expectations excluding Indonesia and Romania, which are derived from analysts’ consensus expectations.
- Panel 6 ex-ante real policy rates computed from policy rate minus analysts’ consensus inflation forecasts for 6 months ahead.
- Noted country labels appearing in figures: IN, ID*, TH, MY, ZA, HU, RO*, PL, MX, CO, CL, BR with historical series spanning 2017–25.

### Frontier economies and international debt markets
- Frontier issuance was robust in the first quarter as spreads compressed and financial conditions eased (Figure 1.16).
- Distribution: the share of frontier sovereigns with yields above 10 percent rose from 10 percent to almost 30 percent in April.
- Historical observation: only a small number of frontier bonds have been issued at yields exceeding 10 percent; such issuances have generally been smaller and of shorter maturity.
- Noted issuers and events: Nigeria returned to the eurobond market in late 2024; Egypt returned in January 2025; Angola obtained foreign currency financing via a total return swap; largest eurobond issuance in Africa in Q1 came from Côte d’Ivoire.
- A significant amount of frontier international debt is maturing over the next three years (Figure 1.16, panel 4).
- Frontier economies defined as countries with hard currency debt and included in the J.P. Morgan Next Generation Emerging Market (NEXGEM) index.

### China — rising risks to falling prices
- China’s economic outlook is highly uncertain amid tightening external financial conditions and rounds of retaliatory tariffs and countermeasures with the United States.
- Tariffs could amplify existing deflationary pressures and weigh on the renminbi, complicating the macro policy trade-off.
- Property sector adjustment and local government debt overhang continue to dampen demand and elevate risks of debt deflation.
- Policy response: coordinated measures to support housing and address local government “hidden debt” may have prevented some imminent defaults, but a comprehensive strategy is needed to address financially unviable developers and local government financing vehicles, potentially including phasing out forbearance measures to ensure timely loan loss recognition by banks.
- Bank sector: recent capital injection into large state-owned banks provides some buffer, but smaller banks may need more attention.
- Market signals:
  - Government bond yields have continued to decline since the October 2024 GFSR.
  - Analysts’ forecasts of one-year-ahead headline inflation dropped below 1 percent.
  - Term premium on 10-year government bonds has dropped to a record low.
- Financial institutions’ behavior:
  - Weak credit demand and profit outlook have incentivized banks to favor government bonds; large and small banks have expanded exposures, with investment funds and wealth management products overtaking banks as largest buyers of government debt in 2024.
  - Concentrated holdings of government debt by financial institutions could crowd out bank lending and credit creation and raise questions about the size of potential bond losses if inflation and interest rates change.
- Repo and liquidity risks:
  - Leveraged bond purchases financed through repurchase agreements are dominated by very short-term instruments, with overnight and seven-day tenors accounting for nearly 90 percent of transactions.
  - Nonbank financial institutions—particularly securities firms and investment funds—are the largest borrowers and most active participants in the interbank repo market; large banks are the predominant lenders.
  - Recent tightening in interbank liquidity disproportionately affected nonbank participants as investors reassessed the pace of monetary easing amid heightened trade uncertainties.
- Policy implications for China: accommodative macroeconomic policies along with structural and pro-market reforms are urgently needed to bolster near-term activity and prevent further downward spiral in inflation expectations.
- Regulatory implications: additional regulatory measures to prevent excessive concentration of bond holdings, to enhance management of liquidity and maturity risk, and to close regulatory and data gaps could help contain systemic risks emanating from the bond market.

### Sovereign bond market functioning and supply pressures
- Elevated levels of government bond issuance will increasingly be absorbed by relatively price-sensitive private investors, especially if quantitative tightening by central banks continues; all else equal, this could drive up bond yields via higher risk premia and heighten bond price volatility.
- United States:
  - Persistent fiscal deficits with market expectations suggesting stabilization at 6.5–7 percent of GDP need to be financed by substantial Treasury securities issuance.
  - Net issuance of Treasuries is temporarily capped, but refinancing a significant share of maturing debt—40 percent of which is concentrated in the first quarter of 2025—may necessitate a steep increase in supply later in the year, particularly for shorter maturities.
  - Debt ceiling: On January 2, 2025, the debt ceiling became binding again; the current ceiling is set at $36.1 trillion and has been reached.
- Euro area:
  - Net issuance of government bonds is set to ratchet up, mainly driven by financing higher defense and infrastructure spending.
  - Ongoing normalization of the European Central Bank’s (ECB) balance sheet is adding to bonds private investors need to absorb, particularly bunds.
  - A relaxation of Germany’s “debt brake” has prompted market analysts’ concerns about potential increase in government debt issuance and market absorption capacity.
  - Negative bund swap spreads have opened between interest-rate swaps and similar-maturity bunds; prolonged negative bund swap spreads do not necessarily reflect sovereign creditworthiness changes but can raise borrowing costs across the euro area.
- Notes on measures:
  - Gross issuance reflects new debt issuance and refinancing of maturing securities.
  - Net issuance adjusts for central bank transactions, decreasing with asset purchases during quantitative easing and increasing with runoff during quantitative tightening.
  - Swap spread captures the interest rate differential of 10-year EUR-denominated interest rate swaps less Bund securities of the same maturity.

### Constraints on dealer balance sheets and market fragility
- The Treasury market has outgrown dealer balance sheets: the market size is now five times dealers’ balance sheets, up from one-and-a-half times around 20 years ago.
- Intermediation capacity of US primary dealers was pushed toward its limit following heightened volatility after the April 2 tariff announcements.
- Spreads on repurchase agreements have become more sensitive to the quantity of Treasury issuance.
- Episodes of deterioration in market liquidity could become more likely, pushing up term premiums and Treasury yields.
- Recent market turmoil saw unwinding of leveraged trades (Treasury cash-futures basis trades and swap spread trades), higher margin requirements, and deleveraging that narrowed swap spreads.

_International Monetary Fund | April 2025_

### 3. Germany’s Net Issuance Volume versus

### 3. Germany’s Net Issuance Volume versus Swap Spreads

### Dealer balance sheets, intermediation capacity, and market liquidity
- Finding: Swap spread declines during the recent sell-off reflected pressure on dealer balance sheets amid broad deleveraging, while repo funding costs rose only marginally compared with past episodes (for example, the “dash-for-cash” 2020: March 2020 episode).
- Finding: Treasury market functioning was challenged but did not break down; sensitivity of repo rates to issuance suggests intermediation capacity may be approaching its limit.
- Finding: Dealer capacity utilization is proxied by normalized net primary dealer positions in Treasuries and agency MBS, scaled between 0 and 1 relative to in-sample peaks (January 2010 to March 2025). Residual illiquidity measures market-value-weighted spline fitting errors of Treasury yields unexplained by interest rate volatility as captured by the MOVE index.
- Finding: The dotted line in the analysis depicts a fitted quadratic relationship between utilization and residual illiquidity from 2020–present, indicating nonlinearity in how utilization compression translates into illiquidity.

### Shift in dealer business toward higher-margin activities and collateral implications
- Finding: Dealers have increasingly used balance sheets to provide equity margin loans to hedge funds and other clients; equity financing spreads remained more attractive than fixed-income repo spreads despite some declines in equity financing spreads after year-end 2024 and some increases in repo spreads in early April 2025.
- Finding: Smaller dealers have tilted lending toward equity margin loans, whereas major institutional dealers have maintained diversified exposure across asset classes.
- Finding: This shift contributed to weakening in overcollateralization levels (panel 1, dashed black line), exposing dealers to losses if hedge funds cannot repay loans during market stress.
- Finding: Expansion of options market-making activity—partly driven by retail speculative positioning—has further shifted dealers’ focus away from core markets like government bonds.
- Numeric: Only 11 percent of the turnover in global FX derivatives is denominated in emerging market currencies (noted as far less than emerging markets’ share in global trade of more than one-third).

### Cross-border funding, euro area banks, and dollar reliance
- Finding: ECB quantitative tightening has reduced scarcity of European government bonds, raised funding costs for euro area banks, and driven them to tap US repo markets—borrowing dollars against Treasury collateral and swapping proceeds back into euros.
- Finding: Increased reliance on US repo funding has improved availability of the dollar as a funding currency but deepened cross-border interconnections and rollover risks; a sudden loss of access to US repo funding could widen the euro-to-dollar basis and trigger broader funding strains.
- Policy implication: Elevated fragility of cross-border dollar liquidity underscores the importance of globally coordinated backstops—such as standing repo facilities and central bank swap lines—to mitigate systemic risks and prevent disorderly spillovers.

### Money market and swap-rate relationships observed
- Finding: Swap spreads reflect the difference between swap rates and Treasury yields of the same maturity; SOFR swap rates are extended historically using adjusted legacy swap interbank offered rates, with a basis adjustment applied to account for differences between secured overnight and term interbank benchmarks.
- Finding: EFFR dispersion reflects the difference between the 1st and 99th percentile of effective Federal Fund rates. GC-IORB reflects the difference between general collateral overnight repos and the overnight interest on reserve balances. The SOFR-EFFR spread reflects the difference between secured overnight funding rates and effective federal fund rates. The Fed Fund-SOFR basis reflects the difference between near-term Fed Fund futures and SOFR futures.

### Corporate and household vulnerabilities related to trade uncertainty
- Finding: Since the October 2024 Global Financial Stability Report, corporate cash flows remained healthy and balance sheets resilient in aggregate, but corporate bond spreads have widened recently, reflecting investor concerns about higher global tariff rates.
- Finding: US high-yield corporate bond spreads have risen as US business optimism faded; corporate bond valuations remain stretched relative to macro fundamentals (investment grade and high-yield spread misalignments around the 10th and 25th historical percentiles, respectively).
- Finding: Corporate bankruptcies have continued to creep up in major advanced economies.
- Finding: A decent share of corporate debt to be refinanced in the next few years carries a fixed rate below prevailing market yields; increases in credit spreads and funding costs due to refinancing could challenge weaker firms.
- Finding: Heightened trade policy uncertainty raises exchange rate volatility, increasing FX hedging costs and compounding risks for firms with large foreign-currency-denominated debt or limited access to hedging instruments.
- Numeric: Cash buffers (cash and cash equivalents as a percentage of total financial liabilities) have declined to below prepandemic levels in both advanced and emerging market economies by 2023.
- Numeric: Currently, 12 percent of advanced economy corporates have interest coverage ratios (ICRs) below 1; this share is 18 percent for emerging market corporate firms outside China.
- Scenario analysis:
  - IMF staff analysis suggests that a progressive worsening of profit margins, along with increases in spreads and effective funding costs, could impair corporate debt serviceability nonlinearly; the share of debt with poor serviceability could reach 1.5 to 2 times levels in 2023.
  - For emerging market corporates, an initial 50 basis point compression in profit margins combined with an equivalent increase in effective interest rates could raise the share of debt with poor serviceability by 6 percentage points.
  - Under a more adverse scenario producing a 200 basis point impact on profit margins and interest rates, that share could increase by 17 percent.
- Finding: Firms in Latin America, having tapped cheap dollar debt in recent years, have faced larger local currency depreciation; more than 70 percent of bonds issued by firms in major Latin American countries since 2020 have been denominated in dollars, while the corresponding share for emerging markets excluding China averages around 47 percent.

*Source: IMF staff analysis as presented in Chapter 1 (Global Financial Stability Report: Enhancing Resilience Amid Global Trade Uncertainty), April 2025.*

### 5.6 percentage points to 18 percent.

### ch1 - 5.6 percentage points to 18 percent.

### The Direct Lending Segment of Corporate Credit — Mixed Prospects
- Leveraged finance instruments include broadly syndicated loans (BSLs) and direct lending (DL), with DL provided by nonbank lenders (private credit).
- Compared with BSLs, DL borrowers include a larger share of vulnerable borrowers.
- Credit quality trends and distress indicators:
  - DL credit quality showed some improvement through late 2024 alongside a narrowing downgrade-upgrade gap (Figure 1.24, panel 1).
  - DL default rates have been broadly in line with other measures of credit distress, for instance, BSL default rates and banks’ loan loss provisions (Figure 1.24, panel 2).
  - Nearly half of DL borrowers had negative free operating cash flows (FOCF) even before the tariff-related market turmoil (Figure 1.24, panel 3).
  - Health care services and software sectors: 20 and 27 percent, respectively, of DL borrowers in these sectors had S&P credit estimates in the “ccc” category (S&P Global Ratings 2024b).
- Market pressures and behaviors:
  - Rising uncertainty and weakened investor confidence following tariff announcements starting April 2 drove up spreads on new deals and reduced expected deal flow.
  - Market participants express concerns that deterioration in borrower credit quality may not be reflected in accounting valuations of DL loans (stale valuation practices).
  - Private equity (PE) funds under pressure to return capital to limited partners (LPs) are levering up acquired companies to fund special dividends, further straining borrowers’ debt sustainability.
- Structural features raising risk:
  - High usage of payment-in-kind (PIK) provisions and amend-and-extend restructurings; PIK provisions allow borrowers to pay part of interest in cash and capitalize remaining interest into loan principal, potentially deferring recognition of financial issues and increasing debt burdens over time.

### Household Sector Vulnerabilities — Elevated Equity Holdings and Debt-Service Pressure
- Household asset allocation and wealth:
  - Household assets grew rapidly since the end of the pandemic due to price increases in equities and residential housing.
  - Households in most countries now hold more stocks as a share of financial assets than in 2019 (Figure 1.25, panel 1).
  - US households’ stock holdings reached a record high by the end of 2024, driven by appreciation in equity portfolios, modest decline in deposits, and steady holdings of debt securities (Figure 1.25, panel 2).
  - US households’ exposure to equities and investment fund shares now modestly surpasses real estate.
- Vulnerabilities from market corrections:
  - Increasing stock market exposure makes households more vulnerable to a prolonged decline in stock prices; the recent tariff-related stock market correction could directly reduce household wealth.
  - Financial turbulence could exacerbate market sell-offs if retail investors reduce exposures or redeem investment vehicles such as mutual funds.
- Housing markets and debt servicing:
  - Global real home prices have declined gradually and modestly from pandemic highs, aided in part by recent rate-cutting cycles; US home prices have notably remained elevated (Figure 1.25, panel 3).
  - A longer period of higher interest rates could adversely affect households’ debt servicing capacity and erode real estate asset values, particularly in countries with predominantly variable-rate mortgages.
  - US specifics:
    - IMF staff estimates suggest that a 1 percentage point increase in the debt-service ratio is associated with a gradual rise in household delinquency rates in subsequent quarters (Figure 1.25, panel 5).
    - Evidence of modest increases in the household debt-service ratio amid higher mortgage rates (Figure 1.25, panel 4).
    - Lower-income households appear more vulnerable due to higher exposure to variable-rate debt.
    - Delinquency rates for fixed-rate mortgages remain low (Figure 1.25, panel 6), but delinquency rates have increased notably for variable-rate auto loans and credit card debt over the past couple of years.
  - Data point: According to US Federal Housing Finance Agency’s National Mortgage Database, 83 percent of US mortgage holders have an interest rate below 6 percent, a decrease from the mid-2022 peak of about 93 percent (as discussed in the source text).

### Commercial Real Estate (CRE) — Stabilization Signs but Headwinds Persist
- Recent developments:
  - Total CRE returns were 1.3 percent in the fourth quarter of 2024, and transaction volume climbed to positive territory for the first time after bottoming out in the third quarter of 2023 (Figure 1.26, panel 1).
  - Falling policy rates have brought some relief to CRE; both occupier and investment markets show some positive headline balances.
- Heterogeneous recovery:
  - Recovery is uneven across regions and property types:
    - In North America, office sector values declined significantly by 12.3 percent year over year, while industrial and retail values remained steadier (Figure 1.26, panel 2).
    - Offices in Asia and the Pacific and Europe recorded smaller declines.
  - Relative to post-pandemic peaks, private real estate values globally have decreased (Figure 1.26, panel 2).
- Maturities and refinancing risks:
  - Large amounts of CRE debt are coming due in the United States, potentially driving delinquencies higher (Figure 1.26, panel 4).
  - CMBS financing conditions and bank lending standards:
    - Banks appear to have stopped tightening lending standards for CRE (Figure 1.26, panel 6).
    - Surveys indicate mixed financing conditions for CMBS and bank CRE loans.
- Delinquencies and losses:
  - Delinquency rates and net charge-offs vary by property type; rising delinquencies could lead to higher net charge-offs for banks (Figure 1.26, panel 5).

*International Monetary Fund | April 2025 — Chapter 1, excerpted content.*

### 13.2 percent, declining most for offices (20.6 percent),

### ch1 - 13.2 percent, declining most for offices (20.6 percent),

### Commercial Real Estate (CRE) market conditions
- Sector-wide price movements and price gaps:
  - Overall cited decline: 13.2 percent, declining most for offices (20.6 percent).
  - Office price gap (buyer-seller divergence) ranges between 5 percent (Korea) and 30 percent (Germany).
  - Industrial property buyer-seller divergence: −5.2 percent in the United States and 1.5 percent in Japan.
- Refinancing and maturing debt:
  - Estimated $660 billion in commercial and multifamily real estate mortgages in the United States due for payoff in 2025.
  - About $3.2 trillion in CRE debt maturing between 2025 and 2029, accounting for more than half of the $6.1 trillion in outstanding debt.
  - Nearly 30 percent of office loans maturing in 2025 (about $30 billion) may be subject to negative equity.
  - $19 billion of loans on apartment properties (10 percent of maturing loans) may be subject to negative equity.
- CMBS and refinance success rates:
  - 61 percent of US loans that matured in 2024 were actually paid off, compared with 78 percent over the previous decade.
  - Refinance success by property type in 2024:
    - Conduit loans collateralized by office properties: 32 percent refinanced.
    - Industrial, multifamily, and retail conduit loans that expired in 2024: about 85 percent refinanced.
  - Origination of CRE debt remains below pre-2019 levels across all property types:
    - Down by 41 percent for all segments.
    - Down by 54 percent for office real estate.
- Delinquencies and bank losses:
  - Fourth quarter of 2024 overall CRE loan default rate in the United States: about 1.57 percent (highest since 2014).
  - US banks’ net charge-offs on CRE loans rose in 2024 to 0.26 percent at the end of 2024.
  - Office-secured loans are the primary cause for concern; delinquency rates for other property types have leveled off.
- Liquidity and market functioning:
  - Rates offered and haircuts required to finance CMBSs have stabilized among primary dealers (Federal Reserve 2024).
  - Liquidity challenges remain most pronounced in the office sector, where credit availability is tightest.
- Office conversions and vacancy:
  - Office conversions in the United States: 71 million square feet or 1.7 percent of total office space, as of the third quarter of 2024.
  - Market estimates of office vacancy in the United States: between 17 and 20 percent.
- Indirect exposures and systemic considerations:
  - CRE lenders and lessors had higher delinquency rates in Q4 2024 than the previous year.
  - Bank exposure to CRE through providing credit lines to REITs remains relatively low, but indirect exposure through REITs could amplify systemic risks during stress.

### Risks, scenarios, and market drivers
- Downside risk factors:
  - Trade uncertainty and potential disruptions to global supply chains could weaken CRE recovery through lower transaction volumes and higher cap rates, depressing property values and making refinancing more difficult.
  - Higher interest rate term premiums could challenge repayment ability of developers and borrowers.
- Upside potential:
  - CRE sector generally outperforms broader equity market during easing periods; the Federal Reserve cutting cycle could support recovery in prices and valuations, everything else equal.
- Market shifts and investor behavior:
  - Owners forced to sell office buildings at a discount due to high vacancy has encouraged price discovery and reorientation toward emergent property types.
  - Office conversions have surged recently but represent a small part of the market.
- Historical and structural context:
  - Cash flow difficulties among CRE borrowers evidenced by lower payoff rates on maturing loans in 2024 relative to the prior decade.

### Policy recommendations and supervisory actions
- Market infrastructure and crisis preparedness:
  - Ensure market functioning via preparedness to access central bank liquidity facilities and readiness to intervene early to address severe liquidity or market functioning stress, especially in core bond and funding markets.
  - Liquidity can be provided to nonbanks with appropriate guardrails.
  - Financial institutions should be required to test access to central bank instruments periodically.
  - Implement recovery and resolution frameworks to address weak or failing financial institutions without undermining financial stability or risking public funds.
- Monetary policy guidance:
  - Central banks should gauge price movements carefully.
  - Where growth and inflation momentum are set to continue slowing, central banks should gradually ease monetary policy toward a more neutral stance.
  - Where inflation remains stubbornly above targets, central banks should maintain a restrictive monetary stance and affirm commitment to bringing inflation back to targets.
- Emerging market policy guidance:
  - Appropriate policy responses depend on country-specific circumstances per the IMF’s Integrated Policy Framework.
  - For countries with deep FX markets and low foreign currency debt: rely on monetary policy and exchange rate flexibility.
  - For countries with shallow FX markets or large foreign currency debt: consider temporary FX interventions or loosening inflow capital flow management measures if conditions allow and do not impair policy credibility.
  - Strengthen the independence and institutions underpinning monetary and financial sector policies.
- Bank and NBFI supervision:
  - Ensure sufficient capital and liquidity in the banking sector; continue full, timely, and consistent implementation of Basel III and other international standards.
  - Provide better-resourced, independent, intensive, and conclusive supervision; continue stress-testing banks’ exposures, especially to sectors like commercial real estate.
  - Enhance risk assessment of linkages between banks and NBFIs.
- Nonbank financial institutions (NBFIs):
  - Strengthen policies to mitigate vulnerabilities and shock amplification from nonbank leverage.
  - Enhance reporting requirements for NBFIs to distinguish poorly governed and excessive risk-taking institutions.
  - Improve coordination among authorities to ensure sound governance, monitoring, and cross-sectoral oversight of NBFIs.
- Macroprudential and fiscal policy:
  - Strengthen micro and macroprudential frameworks; where buffers are insufficient, tighten macroprudential tools to increase resilience while avoiding broad tightening of financial conditions.
  - Where downturn-induced financial stress occurs, consider releasing macroprudential buffers to help banks absorb losses and support credit provision.
  - With gross sovereign financing needs forecasted to remain above prepandemic averages, fiscal adjustments should focus on credible and growth-friendly rebuilding of buffers to keep debt issuance and external financing costs affordable.
  - Explore liability management operations to manage refinancing risks and smooth debt servicing profiles when opportunities arise.
  - For countries at risk of debt unsustainability, consider early contact with creditors to coordinate an orderly and efficient debt treatment.
- Crypto asset risks:
  - Safeguard monetary sovereignty and strengthen monetary policy frameworks.
  - Guard against excessive volatility in capital flows and adopt unambiguous tax treatment of crypto assets.
  - Consistent, comprehensive, and coordinated implementation of the IMF and FSB road map and other standards is paramount.
  - Monitor crypto projects that may fall under existing banking or securities regulations and supervise activities to address vulnerabilities.
- Multilateral and systemic resilience:
  - Enhance multilateral surveillance to monitor global shocks, cross-country contagion, and spillovers.
  - Strengthen the global financial safety net to enable swift and effective mitigation of financial risks.

*International Monetary Fund | April 2025 — Chapter content excerpt*

### Box 1.2. Lower Bond Yields Are Exerting Pressure on Chinese Insurers

### Box 1.2. Lower Bond Yields Are Exerting Pressure on Chinese Insurers

### Key findings: yields, valuations, and solvency
- Chinese life insurers are under pressure from lower yields on their investments.
- Insurers’ valuations (equity prices) show weaker performance relative to insurers in other major jurisdictions.
- Solvency ratios for Chinese life insurers have deteriorated.
- Liquidity has improved as insurers reduced the share of alternative and illiquid investments in their portfolios.

### Evidence and data scope
- The calculations for the yield on total average investments of Chinese life insurers in panel 1, as well as all calculations in panel 4, are based on a sample that comprises the six listed life insurers or insurance groups in China:
  - China Life Insurance Company
  - China Pacific Insurance Group
  - China Taiping Insurance Holdings Company
  - New China Life Insurance Company
  - Ping An Insurance (Group) Company of China
  - The People‘s Insurance Company (Group) of China
- Insurers’ equity valuations in panel 2 reflect equity prices.
- Sources cited for figures and calculations: Bloomberg Finance L.P.; China National Financial Regulatory Administration; Moody’s Investors Service; S&P Capital IQ Pro; and IMF staff calculations.

### Implications (as presented)
- Lower bond yields have translated into valuation pressures and weaker solvency metrics for Chinese life insurers.
- A shift away from alternative and illiquid assets has supported liquidity positions.

*This box was prepared by Deepali Gautam and Esti Kemp.*

---


_Source: https://www.imf.org/-/media/files/publications/gfsr/2025/april/english/ch1.pdf_