## ch1

## Source details

**Canonical URL:** [ch1](https://www.imf.org/-/media/files/publications/gfsr/2025/october/english/ch1.pdf)

## Other formats

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

---

### Overview and overarching assessment
- Recent market moves and sentiment:
  - Continued appreciation in risk asset prices and a depreciation of the US dollar (about 10 percent so far this year).
  - Markets appear complacent despite trade tensions, geopolitical uncertainties, and rising concerns about sovereign indebtedness.
  - IMF growth-at-risk metrics: global financial stability risks remain elevated, having receded only modestly since the April 2025 Global Financial Stability Report.
  - Key dates/events noted: April 2 tariff announcements; April 9 tariff pause; early April sell-off (April 3 referenced for a short period).

### Major vulnerabilities identified
- Valuation risk
  - Risk asset prices are well above fundamentals according to IMF staff valuation models, increasing the probability of disorderly corrections when adverse shocks occur.
  - Equity and corporate credit valuations have returned to being fairly stretched, with concentration of valuations at a handful of firms—especially the Magnificent 7.
  - The Magnificent 7: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
- Sovereign bond market fragilities
  - Expanding fiscal deficits continue to propel sovereign bond issuance.
  - Advanced-economy sovereign bond markets are increasingly dependent on price-sensitive investors to buy new issuances.
  - Scenario analyses: abrupt yield increases would strain bank balance sheets and add liquidity pressures at open-ended funds; stress in core bond markets could have broad and disruptive ramifications.
- Financial intermediation and NBFIs
  - NBFIs continue to grow and deepen ties with banks, expanding their role in core sovereign bond markets and corporate debt markets (including private credit).
  - Increasing interconnectedness and persistent maturity mismatches could amplify shocks across banks and NBFIs.
  - Growth of stablecoins could offer alternatives to traditional safe assets and bank deposits and influence cross-border capital flows, raising risks of excessive risk taking, rising leverage, and maturity mismatch vulnerabilities.
- Corporate credit risks
  - Weaker firms are struggling amid higher tariffs and refinancing rates; borrower downgrades and restructurings have risen.
  - Retail investor interest in private credit markets and high-yield bond funds could amplify credit downturns.

### Financial market developments and asset valuations — key findings
- Asset prices and volatility
  - Since the April 2025 GFSR, asset prices have rebounded strongly after the April 2 tariff-related sell-off; market volatility across asset classes has declined on net.
  - Decline in volatility supported by expectations of further easing of monetary policy across most major advanced economies and emerging markets.
  - Measures of economic, trade, and geopolitical uncertainty remain elevated despite lower volatility.
- US dollar, sovereign bonds, and term premiums
  - The US dollar has depreciated by about 10 percent so far this year against major currencies.
  - Longer-term sovereign bond yields in most advanced economies have risen even as investors expect monetary policy to ease; term premiums driven up by rising bond supply, ongoing quantitative tightening by central banks, and a slowdown in duration demand.
- Non-US investor exposures and hedging
  - Total non-US investor holdings of US securities increased from $16 trillion to $31 trillion from 2015 to 2024.
  - Holdings characterized by incomplete hedging and could be subject to sudden, large-scale sell-offs.
  - After a brief period of outflows in April, Treasury securities experienced net inflows of about $105.5 billion. US equity net inflows were $95.4 billion over April and May.
  - Increased currency hedging activity by non-US investors appears to have contributed to recent dollar weakness; optimal currency hedging ratios have increased recently.
- Market concentration and sectoral performance
  - Equity market gains have been driven largely by outperformance in AI-related sectors, particularly the M7, while corporate spreads have narrowed.
  - Equity market concentration—especially among AI-related mega-cap firms—is at historical highs.

### FX hedging, dollar exposures, and funding risks (selected metrics)
- Hedge ratios for long-term investors (as of June 2020):
  - Insurers: around 44 percent.
  - Pension funds: around 35 percent.
  - Mutual funds: around 21 percent.
- Japanese life insurers typically hedge 50 percent to 70 percent of their bond portfolios.
- Optimal volatility-minimizing hedge ratio for non-US investors has significantly increased for portfolios of both US equities and Treasuries (Shin, Wooldridge, and Xia 2025).
- Some dollar exposures are not actively managed (examples: direct investments in the United States; foreign reserve buffers).
- The US dollar share of international reserves has declined since the turn of the century.

### Equity valuations and concentration risks (exact measures)
- S&P 500 12-month forward P/E ratio:
  - Climbed back to about the 96th percentile since 1990.
- Model-implied fair-value forward P/E for the S&P 500:
  - About the 81st historical percentile.
  - Comparing model-implied fair value with actual observed forward P/E implies an estimated overvaluation of about 10 percentage points.
- Concentration:
  - IT sector weight: 35 percent of the S&P 500.
  - The Magnificent 7 account for 33 percent of the index.
  - Normalized concentration risk for the S&P 500 has increased by about 20 percentage points over the past decade.
- US household exposure to equities: about 30 percent of total household assets.

### Profit margin expectations and tariff effects (tariff specifics)
- Analysts revised down expected profit margins for most firms this year; margins for the Magnificent 7 revised up.
- Tariff measures cited:
  - Tariffs initiated on semiconductors: 100 percent.
  - Tariffs on steel and aluminum: 50 percent.
  - Tariffs on copper: 50 percent.
- Private fixed investment in information-processing equipment contributed around 57 percent of US real GDP growth since Q4 2024.
- IMF staff risk: tariffs may lead to margin compression across most S&P 500 sectors, including the Magnificent 7.

### Financial conditions and Growth-at-Risk (GaR)
- One-year-ahead global growth is forecast to fall below 0.5 percent, with a 5 percent chance.
- This reflects a 0.1 percentage point improvement in the GaR metric compared with April, but remains around the 30th historical percentile.
- Easier global financial conditions were partially offset by a slight slowdown in private sector credit growth, which has shifted just below the 10th percentile of its historical distribution.
- The probability of growth falling below 2 percent remains broadly unchanged compared with April.

### Interconnected scenarios and amplification channels
- Abrupt yield increase scenario (examples of effects):
  - Strain banks’ balance sheets.
  - Pressure open-ended funds and liquidity in core bond markets.
- Heightened interconnectedness between banks and NBFIs would exacerbate adverse shocks via mutual exposures and maturity transformation linkages.
- Large unhedged non-US holdings of US dollar assets relative to FX market depth could lead to tighter dollar funding conditions and sudden adjustments if hedging or reallocations accelerate.

### Sovereign bond markets, term premiums, and fiscal drivers
- Term premium drivers and market structure:
  - Price-sensitive investors expected to demand higher term premiums to absorb rising bond supply.
  - Continuation of quantitative tightening increased free-floating bonds in the market, exerting upward pressure on term premiums.
- G4 developments and fiscal example:
  - Notable steepening of yield curves among US Treasuries, European government bonds, UK gilts, and Japanese government bonds.
  - The One Big Beautiful Bill Act (Public Law 119–21; enacted July 4, 2025) is projected by the Congressional Budget Office/Joint Committee on Taxation to raise US federal deficits by about $3 to $3.5 trillion over the next decade.

### Frontier and emerging market developments
- Frontier issuance and yields:
  - Primary market bond issuance by frontier economy borrowers reached just over $13 billion by the end of August 2025.
  - Median sovereign eurobond yield among emerging market issuers now exceeds 6.5 percent.
  - Several frontier economy bonds trading above 10 percent.
- Alternative funding examples (early 2025):
  - Panama secured a €1.2 billion bilateral loan from a subsidiary of Bank of America with a two-year maturity.
  - Egypt issued a $1 billion sovereign sukuk through a private placement, fully subscribed by Kuwait Finance House.
  - Angola entered into a $1 billion structured financing arrangement linked to its own sovereign bonds; the deal included contingent liabilities that triggered additional payments amid market volatility.
- Debt-at-risk and tariff sensitivity framework:
  - Additional tariffs measured relative to January 20, 2025, and as of July 12, 2025.
  - Debt-at-risk defined as the share of corporate debt with ICR (interest coverage ratio) below 1.

### Nonbank financial intermediation, NBFI exposures, and stress scenarios
- NBFI scale and bank exposures:
  - Global NBFI sector: share of total global financial assets at 49.1 percent (or $239 trillion) in 2023.
  - NBFI loans represent, on average, 9 percent of banks’ loan portfolio in Europe and the United States, with exposures amounting to about $4.5 trillion:
    - $2.6 trillion corresponds to loans; the rest to undrawn commitments.
  - In the United States, banks representing almost 50 percent of the sample assets have exposures to NBFIs exceeding their Tier 1 capital.
  - Large banks account for 90 percent of all lending to NBFIs.
- Stress-test assumptions and impacts (NBFI deterioration example):
  - IMF staff scenario: average risk weight for NBFI exposures rises from 20 percent to 50 percent; borrowers draw down 100 percent of credit lines and undrawn commitments.
  - Projected CET1 impacts:
    - CET1 ratios would decline by more than 100 basis points in about 10 percent of US banks and 30 percent of European banks.
    - Average additional CET1 ratio impact: 120 basis points for euro area banks and 65 basis points for US banks.
  - More conservative scenario (commitments fully drawn and risk weights reach 100 percent):
    - CET1 ratios fall by 100 basis points or more in 50 percent of banks (representing 39 percent of total assets) in Europe and 12 percent of banks (representing 67 percent of total assets) in the United States.
- Liquidity vulnerability under full drawdown of NBFI commitments:
  - 4 percent of US banks (representing less than 1 percent of total assets) would have negative net available liquidity under a narrow liquidity metric including cash and balances at banks.
  - Under a stricter definition (only cash and deposits at other banks):
    - 5 percent of banks (representing 5 percent of sample assets) in the euro area would lack enough liquid assets.
    - 14 percent of banks (representing 8 percent of sample assets) in the United States would lack enough liquid assets.
  - Impact concentrated among smaller US banks and large euro area banks with large liquidity and credit facilities relative to size.

### Global Stress Test (GST) — bank resilience findings (exact figures)
- GST sample: 669 banks from 29 countries, accounting for 74 percent of global sector assets.
- Baseline and adverse scenario assumptions (July 2025 baseline; adverse includes stagflation features):
  - Adverse scenario includes an across-the-board 10 percent increase in tariffs over the baseline for advanced economies and some emerging markets, a 1 percentage point increase in policy rates globally in the first year, and term premia rising by 300 basis points to 500 basis points.
- Aggregate capital impacts:
  - Aggregate global CET1 ratio declines by a modest 70 basis points, from 13 percent in 2024 to 12.3 percent at the end of the stress horizon.
  - Under the adverse scenario, banks representing about 18 percent of global bank assets can be considered weak (CET1 falls below 7 percent).
  - 82 of 669 banks globally projected to fall below 7 percent CET1 in the adverse scenario.
  - Under stricter criteria (CET1 < 7 percent or a decline of 5 percentage points or more), weak banks increase to 137, accounting for 25 percent of global bank assets.
  - Distressed cases requiring recapitalization: account for about 1 percent of global assets and would require a $25 billion recapitalization to bring CET1 to 4.5 percent.
- Drivers of capital depletion: rising loan losses and operating expenses, partially offset by improved net interest income from a steeper yield curve.
- Regional heterogeneity: larger capital depletion for banks in the euro area and other non-US advanced economies; emerging market banks outside China benefit from higher net interest margins.

### US Treasury market functioning, bond mutual funds, and dealer capacity
- Repo market resilience and structural factors:
  - Repo markets remained relatively stable during April 2025; abundant reserves and increased repo central clearing supported functioning.
- Bond mutual funds and margin exposures:
  - US-domiciled bond mutual funds manage about $5 trillion in assets, of which one quarter is in US Treasuries.
  - Under a 100 basis point curve shift, variation margin calls would amount to about $20 billion.
  - Forced sales under April 2025 outflow patterns and a 60 basis point interest rate increase estimated at $66 billion, with over half the liquidation being Treasury securities.
  - In a severely adverse scenario (99th historical percentile outflows + 100 basis point rate shock), forced Treasury sales would exceed current dealer Treasury inventories, potentially overwhelming dealer intermediation capacity and causing disorderly conditions.
- April 2025 episode differences versus March 2020:
  - Fund outflows were relatively limited compared with March 2020.
  - Cash-futures basis trades did not unwind as they did in March 2020.
  - A leveraged fund “swap spread” trade reportedly unwound and contributed to Treasury market volatility.
- Intraday dynamics: Treasuries initially benefited from “flight to safety” but yields reached a tipping point as market stress continued.

### Corporate credit, tariffs, and private credit
- Corporate balance sheets and behavior:
  - Aggregate corporate balance sheets remain healthy despite margin revisions; vulnerabilities persist.
  - So far this year, US financial, technology, and communications services firms have bought back near $1 trillion of stocks on an annualized basis.
  - Japan: ratio of share buybacks to market capitalization on pace to reach around 2.4 percent in 2025, compared with 1.1 percent in 2024.
- Tariff scenarios and corporate margin sensitivity:
  - IMF staff analysis: for the average country, additional tariffs would reduce firms’ profit margin by 1 percentage point.
  - Two pass-through extremes used:
    - 100 percent cost pass-through from a country’s exporters to US consumers.
    - 0 percent pass-through with equal distribution of tariff-related costs between importing and exporting firms.
  - Rising refinancing costs could push a sizable share of firms to an ICR below 1.
- Private credit:
  - Direct lending industry shows resilience but faces pressures from elevated policy rates and refinancing needs.
  - Share of borrowers with cash-only ICR below 1 has declined considerably, returning to pre–interest-rate-hiking-cycle levels.
  - Continued retail participation in private credit raises conduct and run risks; recommendations include lengthening redemption frequency and stronger disclosure.

### Stablecoins, tokenization, and policy implications
- Stablecoin market growth:
  - From about $3 billion in 2019 to almost $300 billion at the end of September 2025, driven mainly by USDT, USDC, and other fiat-backed stablecoins pegged to the US dollar.
- Legal and regulatory moves:
  - The Guiding and Establishing National Innovation for US Stablecoins Act signed into law in July 2025; the Digital Asset Market Clarity Act and the EU Markets in Crypto-Assets Regulation referenced; Hong Kong SAR’s new regime noted.
- Projections and market role:
  - US Treasury Borrowing Advisory Committee projection: an eightfold increase in stablecoin market capitalization to about $2 trillion by 2028—roughly $500 billion annually.
- Reserve composition and market impact:
  - Stablecoin issuers hold significant volumes of short-term government debt and are among the largest buyers, putting downward pressure on US Treasury bill yields.
- Risks and channels:
  - Run risk: forced selling of reserve assets could spill into bank deposits and government bond and repo markets.
  - Potential for currency substitution, reduced monetary policy transmission in weaker economies, and effects on seigniorage.
  - Tokenization of traditional instruments may compete with stablecoins and affect Treasury bill demand and short-term markets.

### Policy recommendations (chapter summary)
- Monetary and macro policy
  - Remain attentive to potential risks to inflation, especially where inflation is still above target.
  - Preserve central bank operational independence.
- Fiscal policy
  - Curb government deficits to reduce pressure on sovereign bond markets.
- Financial regulation and supervision
  - Implement internationally agreed-upon prudential standards (for example, Basel III).
  - Strengthen financial sector safety nets and NBFI oversight.
  - Promote effective regulation and supervision of stablecoins.
  - Ensure supervisory coordination across banks and NBFIs and improve recovery and resolution frameworks.
- Market-structure and investor protections
  - Reduce incentives for investor runs by lengthening redemption frequency for funds investing in illiquid assets; strengthen disclosure and liquidity management for private credit funds.
  - Implement FSB’s high-level recommendations for crypto assets and the IMF-FSB policy recommendations.

*Source: Chapter 1 (Analysts’ Revisions of Expected Profit) — Global Financial Stability Report: Shifting Ground Beneath the Calm, International Monetary Fund, October 2025.*

### Chapter 1 at a Glance

### Chapter 1 at a Glance

### Introduction and overarching assessment
- Recent months: continued appreciation in risk asset prices and a depreciation of the US dollar (about 10 percent so far this year).
- Government debt has continued to rise; nonbank financial intermediaries (NBFIs) and stablecoins have continued to grow.
- Markets appear complacent despite trade tensions, geopolitical uncertainties, and rising concerns about sovereign indebtedness.
- IMF growth-at-risk metrics: global financial stability risks remain elevated, having receded only modestly since the April 2025 Global Financial Stability Report.
- Key dates and events noted in the chapter: April 2 tariff announcements; April 9 tariff pause; early April sell-off (April 3 referenced for a short period).

### Major vulnerabilities identified
- Valuation risk
  - Risk asset prices are well above fundamentals according to IMF staff valuation models, increasing the probability of disorderly corrections when adverse shocks occur.
  - Equity and corporate credit valuations have returned to being fairly stretched, with concentration of valuations at a handful of firms—especially the Magnificent 7—at historical highs.
  - The Magnificent 7 companies: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
- Sovereign bond market fragilities
  - Expanding fiscal deficits continue to propel sovereign bond issuance.
  - Advanced-economy sovereign bond markets are increasingly dependent on price-sensitive investors to buy new issuances.
  - Scenario analyses: abrupt yield increases would strain bank balance sheets and add liquidity pressures at open-ended funds; stress in core bond markets could have broad and disruptive ramifications.
- Financial intermediation and NBFIs
  - NBFIs continue to grow and deepen ties with banks, expanding their role in core sovereign bond markets and corporate debt markets (including private credit).
  - IMF Global Stress Test (GST): the weak tail of global banks has diminished compared with two years ago, but a sizable group of weak banks remains.
  - Increasing interconnectedness and persistent maturity mismatches could amplify shocks across banks and NBFIs.
  - Growth of stablecoins could offer alternatives to traditional safe assets and bank deposits and influence cross-border capital flows, raising risks of excessive risk taking, rising leverage, and maturity mismatch vulnerabilities.
- Corporate credit risks
  - Weaker firms are struggling amid higher tariffs and refinancing rates; borrower downgrades and restructurings have risen.
  - Retail investor interest in private credit markets and high-yield bond funds could amplify credit downturns.

### Financial market developments and asset valuations — key findings
- Asset prices and volatility
  - Since the April 2025 GFSR, asset prices have rebounded strongly after the April 2 tariff-related sell-off; market volatility across asset classes has declined on net.
  - This decline in volatility has been supported by expectations of further easing of monetary policy across most major advanced economies and emerging markets.
  - Despite declining volatility, measures of economic, trade, and geopolitical uncertainty remain elevated.
- US dollar, sovereign bonds, and term premiums
  - The US dollar has depreciated by about 10 percent so far this year against major currencies.
  - Longer-term sovereign bond yields in most advanced economies have risen even as investors expect monetary policy to ease; term premiums have been driven up by rising bond supply, ongoing quantitative tightening by central banks, and a slowdown in duration demand.
- Non-US investor exposures and hedging
  - Total non-US investor holdings of US securities increased from $16 trillion to $31 trillion from 2015 to 2024.
  - These holdings are characterized by incomplete hedging and could be subject to sudden, large-scale sell-offs.
  - After a brief period of outflows in April, Treasury securities experienced net inflows of about $105.5 billion. US equity net inflows were $95.4 billion over April and May, according to Treasury International Capital System data.
  - Increased currency hedging activity by non-US investors appears to have contributed to recent dollar weakness; optimal currency hedging ratios have increased recently.
- Market concentration and sectoral performance
  - Equity market gains have been driven largely by outperformance in AI-related sectors, particularly the M7, while corporate spreads have narrowed.
  - Equity market concentration—especially among AI-related mega-cap firms—is at historical highs.

### Interconnected scenarios and amplification channels
- An abrupt yield increase—triggered, for instance, by debt sustainability concerns—could:
  - Strain banks’ balance sheets.
  - Pressure open-ended funds and liquidity in core bond markets.
- Heightened interconnectedness between banks and NBFIs would exacerbate adverse shocks via mutual exposures and maturity transformation linkages.
- Large unhedged non-US holdings of US dollar assets relative to FX market depth could lead to tighter dollar funding conditions and sudden adjustments if hedging or reallocations accelerate.

### Policy recommendations (summary of chapter urgings)
- Monetary and macro policy
  - Remain attentive to potential risks to inflation, especially where inflation is still above target.
  - Preserve central bank operational independence.
- Fiscal policy
  - Curb government deficits to reduce pressure on sovereign bond markets.
- Financial regulation and supervision
  - Implement internationally agreed-upon prudential standards.
  - Strengthen financial sector safety nets and NBFI oversight.
  - Promote effective regulation and supervision of stablecoins.

*Source: Chapter 1 at a Glance, Global Financial Stability Report (October 2025).*

### 1. Decomposition of Changes in Longer-Term Bond Yields since Early

### 1. Decomposition of Changes in Longer-Term Bond Yields since Early April 2025 in Selected Advanced Economies

### FX Hedging, Dollar Exposures, and Funding Risks
- Hedge ratios for long-term investors are incomplete and vary by investor type:
  - Insurers: around 44 percent (as of June 2020).
  - Pension funds: around 35 percent (as of June 2020).
  - Mutual funds: around 21 percent (as of June 2020).
- Japanese life insurers typically hedge 50 percent to 70 percent of their bond portfolios.
- Recent estimates (Shin, Wooldridge, and Xia 2025) indicate the optimal volatility-minimizing hedge ratio for non-US investors has significantly increased for portfolios of both US equities and Treasuries across currencies.
- Many investors appear underhedged relative to this optimal ratio; a dollar weakening could prompt non-US investors to increase currency hedging, which would involve selling US dollars forward or repatriating dollar deposits and could amplify dollar weakness.
- Large dollar asset exposures are concentrated in international financial centers and jurisdictions with large NBFIs; in some economies, dollar exposures are disproportionately large relative to local foreign exchange market depth.
- Jurisdictions with larger US dollar asset exposure relative to foreign exchange market depth currently have wider CIP deviations, linking hedging flows to dollar funding pressures.
- Some dollar exposures are not actively managed (examples: direct investments in the United States; foreign reserve buffers), and thus may be relatively insensitive to market developments.
- The US dollar share of international reserves has declined since the turn of the century, reflecting portfolio diversification by central bank reserve managers and potentially exerting downward pressure on the dollar over time.

### Equity Valuations and Concentration Risks
- Global equity prices rebounded since April 2025; the rebound has outpaced expected future earnings.
- S&P 500 12-month forward price-to-earnings (P/E) ratio:
  - Climbed back to about the 96th percentile since 1990.
  - Trades at a premium relative to other advanced and emerging markets.
- Model-implied fair-value forward P/E for the S&P 500 is about the 81st historical percentile.
  - Comparing model-implied fair value with actual observed forward P/E implies an estimated overvaluation of about 10 percentage points.
- Concentration risk in the S&P 500 is at a historic high:
  - IT sector weight: 35 percent of the S&P 500.
  - The Magnificent 7 account for 33 percent of the index.
  - Concentration risk (inverse Herfindahl-Hirschman Index) is now substantially higher than during the dot-com bubble.
  - Normalized concentration risk for the S&P 500 has increased by about 20 percentage points over the past decade, whereas comparable benchmark indices in other jurisdictions have seen far less increase.
- High concentration, combined with historically elevated US household exposure to equities (about 30 percent of total household assets), raises vulnerability to sharp corrections and prolonged declines in the benchmark index.

### Profit Margin Expectations and Tariff Effects
- Analysts have revised down expected profit margins for most firms this year, while margins for the Magnificent 7 have been revised up.
- A forward-looking risk: tariffs may lead to margin compression across most S&P 500 sectors, including the Magnificent 7.
- Tariff measures and sector-specific restrictions could raise costs and lower revenues:
  - Tariffs initiated on semiconductors: 100 percent.
  - Tariffs on steel and aluminum: 50 percent.
  - Tariffs on copper: 50 percent.
- Private fixed investment in information-processing equipment (a proxy for AI investments in data centers) has contributed around 57 percent of US real GDP growth since the fourth quarter of 2024.
- Tariffs and new export controls have raised costs throughout some AI-related firms’ supply chains, as noted in recent earnings reports.

### Financial Conditions and Growth-at-Risk
- The rebound in asset prices and a weaker dollar have eased financial conditions globally.
  - The abrupt tightening after the April 2 tariff announcement proved short-lived; financial conditions in the euro area and the United States returned to pre-event levels.
  - Other advanced economies and emerging markets (including China) have seen more accommodative conditions.
- In the United States, an improvement in corporate valuations (equity prices, corporate bond spreads) amid falling volatility drove financial conditions back into easy territory by historical standards.
- In emerging markets (including China), external financing risks have lowered amid a weaker dollar; however, the Financial Conditions Index for China does not capture the recent slowdown in bank lending.
- The IMF’s updated growth-at-risk (GaR) assessment reveals that near-term downside risks to financial conditions remain elevated despite easing conditions.

*Source: IMF staff analysis, Chapter 1, Global Financial Stability Report: Shifting Ground Beneath the Calm (October 2025).*

### 1. Analysts’ Revisions of Expected Prot

### 1. Analysts’ Revisions of Expected Profit

### Earnings and Profit Margin Measures
- Panel definitions and normalization:
  - Year-end 2025 earnings and profit margin estimates shown for M7 and for S&P 500 companies excluding the M7 (the S&P 493).
  - M7 = Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
  - Expected earnings = sum of expected year-end 2025 net income for all companies in the M7 and S&P 493, respectively.
  - Profit margins = sum of expected year-end 2025 revenue divided by net income.
  - Series normalized to equal 100 on January 1, 2025.

### Historical and Revision Patterns
- Panel 2: range of quarterly 12-month trailing profit margins since 2015 (advanced economies and emerging markets split shown).
- Panel 3: analyst revisions depicted as percentage point change of expected year-end 2025 profit margins since April 2 (bars show regional heterogeneity).

### 2. Global Growth-at-Risk and Financial Conditions

### Current Assessment
- One-year-ahead global growth is forecast to fall below 0.5 percent, with a 5 percent chance (Figure 1.6, panel 1, blue dot).
- This reflects a 0.1 percentage point improvement in the GaR metric compared with April (red dot), but remains around the 30th historical percentile (Figure 1.6, panel 2).
- Overall balance of risks to global growth over the next year continues to be tilted to the downside; the probability of growth falling below 2 percent remains broadly unchanged compared with April.

### Financial Conditions and Credit
- Easier global financial conditions were partially offset by a slight slowdown in private sector credit growth, which has shifted just below the 10th percentile of its historical distribution.
- IMF FCI notes: lower FCI implies easier financial conditions; series constructed using pricing indicators (excludes balance sheet or credit growth metrics).

### 3. Emerging and Frontier Markets — Developments and Risks

### Recent Improvements and Remaining Cautions
- Dollar depreciation and resolved trade deals eased pressures on emerging market financial markets, alleviating asset and funding market stress.
- Subdued energy prices reduced import costs and external vulnerabilities for energy importers.
- Disinflation progress allowed several emerging market central banks to ease policy rates; many banks continue cautious, gradual rate cuts due to core inflation stickiness.

### Market Signals and Vulnerabilities
- Hard currency sovereign spreads narrowed; implied FX volatility declined for most markets.
- Domestic equity markets rebounded; corporate bond spreads declined.
- Stretched valuations: investment-grade emerging market spreads narrowed to levels last seen in 2007; high-yield spreads fell to post-pandemic lows — raising concerns over whether valuations reflect underlying fragilities.
- FX option markets: ratio of implied volatilities of three-month 10-delta butterfly options to three-month at-the-money options is much higher than historical average for sub-investment-grade emerging market currencies (Figure 1.7, panel 4, yellow line), while lower than historical average for investment-grade emerging market currencies.
- Lower-rated emerging markets tend to have projected long-term real interest rates higher than long-term real growth prospects (r–g), posing fiscal sustainability risks (Figure 1.7, panel 5).

### 4. Frontier Economies — Funding and Maturities

### Issuance and Market Access
- Primary market bond issuance by frontier economy borrowers reached just over $13 billion by the end of August 2025 (Figure 1.8, panel 1).
- Median sovereign eurobond yield among emerging market issuers now exceeds 6.5 percent.
- Several frontier economy bonds are trading above 10 percent, raising refinancing cost concerns.
- Rollover risks amplified with large amounts of bonds needing repayment in late 2025 and early 2026 (Figure 1.8, panel 3).

### Alternative Funding Strategies and Risks
- Frontier borrowers increasingly using shorter tenors and smaller deal sizes.
- Examples of alternative funding in early 2025:
  - Panama secured a €1.2 billion bilateral loan from a subsidiary of Bank of America with a two-year maturity.
  - Egypt issued a $1 billion sovereign sukuk through a private placement, fully subscribed by Kuwait Finance House.
  - Angola entered into a $1 billion structured financing arrangement linked to its own sovereign bonds; the deal included contingent liabilities that triggered additional payments amid market volatility earlier this year.
- While alternative funding can be cost-effective relative to market rates and help meet maturing obligations, increased reliance on private placements, bilateral loans, and structured financings raises transparency and debt sustainability concerns, especially when obligations are not subject to the same market discipline or reporting standards as public bonds.

### 5. Sovereign Bond Markets and Fiscal Pressures

### Market Dynamics and Risks
- Bond market stability is fundamental because sovereign bonds serve as benchmarks for asset prices and collateral.
- Despite stabilization since the abrupt sell-off after the April 2 tariff announcement, indicators point to fragility:
  - Steepening yield curves across the G4.
  - More negative swap spreads.
  - Persistent erosion of convenience yields.

### Fiscal Drivers
- Investor concerns about large fiscal deficits have added pressure on long-term yields.
- G4 developments:
  - Notable steepening of yield curves among US Treasuries, European government bonds, UK gilts, and Japanese government bonds (Figure 1.9, panel 1).
  - Widening in swap spreads (spreads becoming more negative) capturing rising credit risk and related pressures.
- US legislative example: the One Big Beautiful Bill Act (Public Law 119–21; enacted July 4, 2025) is projected by the Congressional Budget Office/Joint Committee on Taxation to raise US federal deficits by about $3 to $3.5 trillion over the next decade. Revenue prospects previously linked to tariffs were legally tenuous and excluded from credible deficit scoring.

Final italic source attribution:
*Source: Chapter 1 (Analysts’ Revisions of Expected Profit) — Global Financial Stability Report: Shifting Ground Beneath the Calm, International Monetary Fund, October 2025.*

### 1. G4 and Emerging Market 10-Year

### 1. G4 and Emerging Market 10-Year

### Aggregate yields, swap spreads, and investor concerns
- Investor concerns about larger fiscal deficits are increasingly reflected in widening swap spreads (panel reference to Figure 1.9, panel 1).
- Swap spreads are computed as the difference between overnight swap rates and sovereign yields of the same maturity; overnight rates are extended historically using interbank rates.
- In a G4 composite (GDP-weighted across the euro area, Japan, the United Kingdom, and the United States), yields and swap spreads have been influenced by fiscal considerations and market structure changes.

### Fiscal deficits, free float, and term premiums
- Funding pressures in the financial system have been increasingly driven by fiscal considerations, exhibiting strong co-movement with the projected average budget balance over the next five years (Figure 1.9, panel 2).
- Price-sensitive investors are expected to demand higher term premiums as compensation for absorbing rising bond supply, exerting upward pressure on yields.
- Continuation of quantitative tightening by major central banks has increased the amount of free-floating bonds in the market to be absorbed by price-sensitive investors, exerting upward pressure on term premiums, all else equal (Figure 1.9, panel 3).
- Duration term premiums are calculated based on market pricing of fully collateralized and centrally cleared interest rate swaps; they reflect compensation for taking on duration risk driven by conjunctural factors rather than shifts in perceived creditworthiness.
- The term premium is defined as compensation that investors require for bearing the risk that interest rates may change over the life of the bond (Adrian, Crump, and Moench (2013) methodology for US treasuries, bunds, gilts, and Japanese government bonds; aggregated using G4 GDP weights).

### Emerging market swap spreads, debt, and fiscal cost
- In a panel of major emerging markets, the spread between 10-year interest rate swaps and 10-year local currency bonds has turned more negative over the past decade, declining by almost 50 basis points (Figure 1.10, panel 1).
- Some countries (for example, Colombia, Mexico, and South Africa) have experienced a decline in the swap spread by more than 100 basis points.
- Assuming an average stock of domestic debt at 40 percent of GDP, a −50 basis point swap spread equates to an increased annual fiscal cost of 0.2 percent of GDP.
- A negative swap spread is likely to:
  - Drive up interest rates of private sector debt or lead to some crowding out of private sector debt.
  - Reduce pass-through of monetary policy on the real economy, given the swap market’s close link to policy rates.
- Widening emerging market swap spreads reflect a premium that investors require to absorb large sovereign bond issuances, even though increased buying by large domestic investors such as pension funds and insurance companies has kept sovereign bond markets resilient.
- Swap spreads tend to turn more negative for emerging markets whose US dollar sovereign spreads or CIP deviations rose the most during the average year or have experienced the largest increase in the holdings of domestic debt by foreigners during the average year (Figure 1.10, panel 2).
- Increased foreign buying could be because higher bond yields relative to domestic funding rates are attractive; foreign investors who prefer interest rate swaps to bonds because of smaller balance sheet impact or ease of access amid capital controls may have helped compress swap spreads.

### Convenience yields for longer-duration bonds (domestic and cross-border)
- Safe-asset supply (excluding central bank holdings) in primary reserve currencies has risen amid fiscal expansion across jurisdictions (Figure 1.11, panel 1), putting upward pressure on bond yields.
- Demand for long-duration safe assets has declined, amid a reduction in foreign exchange reserves denominated in the largest reserve currencies.
- Convenience yields measure the premium investors are willing to pay to hold safe assets; erosion of convenience yields can signal and amplify funding market strains by:
  - Prompting lenders in repo markets to demand higher haircuts on safe assets pledged as collateral.
  - Causing banks and investors to diversify toward substitute assets with fewer safe-asset properties and shallower market depth, leading to upward pressure on funding spreads.
- Domestic convenience yields (DCYs):
  - Measured as the yield spread between five-year AAA-rated corporate bonds and government bonds, adjusted for differences in credit risk (following Krishnamurthy and Vissing-Jorgensen (2012)).
  - DCYs for European government bonds, gilts, and US Treasuries have not had clear directional trends over the past few years, although they have seen periods of transitory erosion, particularly in US Treasuries.
- Cross-border convenience yields (CCYs):
  - Captures the five-year yield gap between foreign-exchange-hedged foreign government bonds and US Treasuries, bunds, gilts, or Japanese government bonds (following Du, Im, and Schreger (2020)).
  - The CCY for US Treasuries has seen a secular erosion against other G4 government bonds over the past decade but has remained broadly stable since April.
- Market behavior in the April 2025 episode:
  - DCYs first declined sharply for European government bonds and US Treasuries, indicating strengthened investor preference for these government bonds over high-quality corporate bonds, then gradually returned to prior levels.
  - CCYs remained stable, indicating Treasuries’ safe-asset status compared with other G4 government bonds was broadly maintained.
- The relative stability of convenience yields likely helped keep funding markets orderly during the April episode; the secular decline of CCYs indicates cross-border diversification in safe-asset holdings could be under way.

### Sovereign bond market functioning and nonbank financial intermediaries (NBFIs)
- US Treasury markets weathered the April 2025 tariff turmoil without the severe dislocations of March 2020, raising the question of structural improvements versus a different/less severe shock.
- In both March 2020 and April 2025 episodes, Treasury yields initially declined as the Chicago Board Options Exchange’s Volatility Index (VIX) increased, reflecting “flight to safety” dynamics; but Treasury yields reached a tipping point as market stress continued to increase, with Treasury yields rising beyond a certain VIX level (Figure 1.12, panel 1).
- During April 2025:
  - Fund outflows were relatively limited compared with March 2020 (Figure 1.12, panel 2).
  - Cash-futures basis trades did not unwind as they did in March 2020, which helped prevent a 2020-like crisis.
  - A leveraged fund “swap spread” trade reportedly unwound and contributed to Treasury market volatility.
- Nonbank financial intermediaries remain vulnerable to large and persistent bond market shocks; limited unwinding of large arbitrage trades in April 2025 reduced the amplification of market stress relative to March 2020 but did not eliminate NBFI vulnerabilities.

*International Monetary Fund | October 2025 — Chapter 1 content (figures and panels referenced are from the source PDF).*

### 1. Intraday 10-Year US Treasury Yield

### 1. Intraday 10-Year US Treasury Yield

### US Treasury market functioning and the April 2025 episode
- Circumstantial factors limited market stress in April 2025: the April 2 tariff announcement was followed by a policy reversal within a week, limiting the duration and severity of market stress.
- Structural factors supporting market functioning in April 2025:
  - Repo markets remained relatively stable during the episode.
  - Regression analysis indicates repo spreads remained contained overall in 2025 in part because of increased banking sector reserves and partly because dealer balance sheet usage exerted only limited upward pressure on rates.
  - Increased volumes of repo central clearing (through “sponsored clearing”) helped preserve dealer balance sheet capacity.
  - Higher haircuts involved in central clearing likely curbed repo leverage and enhanced market stability.

### Repo market structural resilience (findings from Figure 1.13)
- Repo spreads sensitivity:
  - Repo spreads were kept low by abundant reserves in 2025; dealer balance sheets exerted mild upward pressure.
- Dealer positions:
  - Dealers expanded their Treasury and repo positions in 2019–25 (percent of total marketable debt).
- Sponsored clearing:
  - The increase in centrally cleared hedge fund repo (through sponsoring) likely moderated market functioning pressures; panel shows sponsored repo share of hedge fund repo positions, 2020–25 (percent).

### Bond mutual funds, variation margin, and forced liquidations (findings from Figure 1.14)
- Scale of bond mutual funds:
  - US-domiciled bond mutual funds manage about $5 trillion in assets, of which one quarter is in US Treasuries.
- Variation margin exposure:
  - Under the scenario of a 100 basis point curve shift, variation margin calls would amount to about $20 billion.
  - Margin calls on derivative contracts can compound liquidity pressure for some funds, but an analysis suggests the impact is likely smaller and heterogeneous across funds (some face margin calls, others receive variation margin credit).
- Forced sales under waterfall approach (April 2025 flow patterns + interest rate shocks):
  - Assuming April 2025 outflow patterns and a 60 basis point increase in interest rates, bond funds’ forced sales are estimated at $66 billion, with over half the liquidation being Treasury securities.
  - Larger shocks increase both the total volume of forced sales and the proportion of Treasury holdings liquidated.
  - In a severely adverse scenario where bond fund outflows reach their 99th historical percentile and interest rates rise by 100 basis points, forced Treasury sales would exceed current dealer Treasury inventories, potentially overwhelming dealer intermediation capacity and likely causing disorderly conditions in Treasury markets.
- Historical comparison:
  - The magnitude of outflows in the April 2025 scenario is much smaller than in the March 2020 scenario.

### Implications for dealer intermediation capacity
- Large, rapid forced sales of Treasuries are more likely to overwhelm dealer intermediation capacity if outflows are large or combined with large interest rate moves (example: 99th percentile outflows + 100 basis point rate shock).

### Global bank stress test results and broader financial stability (findings from GST)
- GST sample and coverage:
  - The Global Stress Test (GST) examined 669 banks from 29 countries, accounting for 74 percent of global sector assets.
- Baseline and adverse scenario assumptions:
  - The July 2025 baseline scenario assumes stable unemployment, a slight decline in global GDP growth before recovering to about 3 percent in 2027, and falling short-term interest rates that contribute to improvement in the global CET1 ratio of 6 basis points.
  - The GST adverse scenario assumes stagflation with tight financial conditions, including:
    - An across-the-board 10 percent increase in tariffs over the baseline for advanced economies and some emerging markets.
    - A corresponding 1 percentage point increase in policy rates globally in the first year.
    - Term premia rising by 300 basis points to 500 basis points across advanced economies and emerging markets.
- Aggregate capital impacts:
  - The aggregate global CET1 ratio declines by a modest 70 basis points, from 13 percent in 2024 to 12.3 percent at the end of the stress horizon.
  - The global average CET1 ratio increased from about 12.5 percent in 2022 to 13 percent in 2024, contributing to resilience.
- Weak banks and asset shares:
  - Under the adverse scenario, banks representing about 18 percent of global bank assets can be considered weak, as their Common Equity Tier 1 capital (CET1) ratio falls below 7 percent.
  - 82 of 669 banks globally are projected to fall below 7 percent CET1 in the adverse scenario.
  - Under stricter criteria—either a CET1 ratio falling below 7 percent or a decline of 5 percentage points or more—the number of weak banks increases to 137 globally, accounting for 25 percent of global bank assets.
- Severe distress and recapitalization needs:
  - A few institutions would not meet the minimum 4.5 percent CET1 ratio under the adverse scenario; these distressed cases account for about 1 percent of global assets and would require a $25 billion recapitalization to bring the CET1 ratio back to 4.5 percent.
- Drivers of capital depletion:
  - Rising loan losses and operating expenses are the main forces behind capital depletion under the adverse scenario, partially offset by improved net interest income from a steeper yield curve.
- Regional heterogeneity:
  - Capital depletion is larger for banks in the euro area and other non-US advanced economies than in other regions because of greater sensitivity to macrofinancial shocks.
  - Emerging market banks outside China benefit from higher net interest margins in the adverse scenario.

_Italic: Source: ch1 - 1. Intraday 10-Year US Treasury Yield (PDF chapter)._

### CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS

### CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS

### Trade tensions and default risk in trade-exposed sectors
- About 10 percent of total loans in the United States and the euro area go to the manufacturing, retail, and wholesale trade sectors, which are vulnerable to trade tensions.
- In Q1 2025, expected default frequencies increased by 100 basis points for trade sectors in the United States before subsiding by July.
- If a 100 basis point rise in expected default frequencies persisted for a year, the average additional CET1 ratio impact would be:
  - decline by 10 basis points in the United State
  - decline by 20 basis points in the euro area
- The most affected banks in this scenario have higher capital ratios.

### Stronger bank–nonbank (NBFI) nexus: exposures, concentration, and channels of contagion
- NBFI loans represent, on average, 9 percent of banks’ loan portfolio in Europe and the United States, with exposures amounting to about $4.5 trillion:
  - $2.6 trillion corresponds to loans; the rest to undrawn commitments.
- Growth of the global NBFI sector: share of total global financial assets at 49.1 percent (or $239 trillion) in 2023.
- Concentration features:
  - In the United States, banks representing almost 50 percent of the sample assets have exposures to NBFIs exceeding their Tier 1 capital.
  - Large banks account for 90 percent of all lending to NBFIs.
  - Exposure concentration is more severe among large regional banks and those with assets under $100 billion.
- Private equity and credit funds exposure:
  - Private equity and credit funds exposure amounts to $497 billion.
  - This exposure grew by 59 percent between the fourth quarter of 2024 and the second quarter of 2025.
  - Five large fund managers account for about one-third of the aggregate loan commitments of the entire private credit and equity industry.
- US banks with high NBFI exposure (exposure > 100 percent of Tier 1 capital) rely more on noncore and wholesale funding.

### Stress-test scenarios and solvency impacts from NBFI deterioration
- IMF staff scenario assumptions:
  - Average risk weight for NBFI exposures rises from 20 percent to 50 percent.
  - Borrowers draw down 100 percent of credit lines and undrawn commitments.
- Projected CET1 impacts under this scenario:
  - CET1 ratios would decline by more than 100 basis points in about 10 percent of US banks and 30 percent of European banks.
  - Average additional CET1 ratio impact: 120 basis points for euro area banks and 65 basis points for US banks (reflecting higher NBFI exposure relative to risk-weighted assets in Europe).
- More conservative scenario:
  - Commitments fully drawn and risk weights reach 100 percent.
  - CET1 ratios fall by 100 basis points or more in 50 percent of banks (representing 39 percent of total assets) in Europe and 12 percent of banks (representing 67 percent of total assets) in the United States.
- Note on sample and data:
  - Panel 4 stress analysis based on 2024 Q2 data for 109 euro area banks and 2025 Q2 data for 362 US banks.
  - NBFI exposure defined as sum of NBFI loans and NBFI unused commitments; amounts based on 134 banks reporting this level of public disclosure in Q2 2025.

### Liquidity pressures from NBFI commitment drawdowns
- Liquidity vulnerability under full drawdown of NBFI commitments:
  - 4 percent of US banks (representing less than 1 percent of total assets) would have negative net available liquidity under a narrow liquidity metric including cash and balances at banks.
  - Under a stricter definition of liquid assets (only cash and deposits at other banks):
    - 5 percent of banks (representing 5 percent of sample assets) in the euro area would lack enough liquid assets.
    - 14 percent of banks (representing 8 percent of sample assets) in the United States would lack enough liquid assets.
- Impact concentrated among:
  - Smaller US banks and large euro area banks with large liquidity and credit facilities relative to size.
  - These banks have lower liquidity ratios, higher asset encumbrance (euro area), higher share of noncore deposits and lower initial CET1 ratio (United States).

### Interest rate challenges, bond valuation losses, and net interest income sensitivity
- Banks’ net interest margins have shown resilience despite monetary easing.
- Banks have reduced sensitivity of net interest income to downward interest shocks in Europe and North America.
- Adverse valuation-loss scenario from IMF GST:
  - If longer-term government bond risk premia surge by 300 basis points to 500 basis points across advanced and emerging market economies, global banks could incur valuation losses of about 1 percentage point of the CET1 ratio.
  - Losses by region in the adverse scenario:
    - North American banks: about 2.5 percentage points of CET1 ratio.
    - European banks: about 1.5 percentage points of CET1 ratio.
- Europe-specific sensitivity:
  - Sensitivity of selected European banks’ economic value of equity to upward shifts in interest rates has increased, raising vulnerability to a rise in long-term bond yields (for example, due to more bond supply or quantitative tightening).
  - European banks may be sensitive to yield-curve steepening, with net interest income also under pressure if policy rates are cut.

### Stablecoins: rapid growth and potential financial-stability channels
- Market growth: from about $3 billion in 2019 to almost $300 billion at the end of September 2025, driven mainly by USDT (Tether), USDC (Circle), and other fiat-backed stablecoins pegged to the US dollar.
- Three main potential financial stability implications of stablecoins identified:
  1. Weaker economies may face currency substitution and reduced effectiveness of policy tools.
  2. The bond market structure could change with potential implications on credit (text ends here).

*Source: CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS (PDF).*

### CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS

### CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS

### Stablecoins: adoption, market structure, and systemic risks
- Legal and regulatory moves:
  - The Guiding and Establishing National Innovation for US Stablecoins Act, signed into law in July 2025, establishes a framework for stablecoins intended to be used for payments, including oversight, reserve assets requirements, and AML/CFT compliance.
  - The Digital Asset Market Clarity Act complements this by providing legal and regulatory clarity for digital assets and reinforcing legitimacy of private sector innovations that accept stablecoins as payment on blockchain platforms.
  - The European Union’s Markets in Crypto-Assets Regulation enforces a framework for crypto assets, including licensing, transparency standards, and AML/CFT requirements for stablecoin issuers and providers of crypto services across Europe.
  - Hong Kong SAR’s new regime positions stablecoins and tokenized assets at the heart of its fintech strategy.
- Market developments and adoption uncertainty:
  - Major US banks are preparing for active participation and adoption; JPMorgan partnered with Coinbase to expand stablecoin access among clients starting in Fall 2025; Bank of America is developing its own stablecoin; Citigroup and JPMorgan are evaluating issuance; mainstream platforms integrated stablecoins (PayPal with PYUSD).
  - Projections by the US Treasury Borrowing Advisory Committee: an eightfold increase in stablecoin market capitalization to about $2 trillion by 2028—roughly $500 billion annually—driven primarily by expectations of broader use in payments and cash management.
  - Adoption challenges: fragmentation across separate blockchains raising transaction costs; stablecoins typically do not offer yields, making them less attractive than money market funds (Nikolaou 2025); improvements in traditional payment systems could reduce demand for blockchain-based alternatives.
- Cross-border flows and macro implications:
  - Net stablecoin flows in 2024 were largely outward from North America to the rest of the world, reflecting dollar demand in those regions.
  - Easy access to dollar-denominated stablecoins raises concerns about currency substitution and reduced monetary policy transmission in jurisdictions with weak macroeconomic fundamentals.
  - A shift from physical currency to stablecoins could reduce seigniorage, affecting central bank income and dividend distribution.
  - Stablecoins may weaken effectiveness of capital flow and foreign exchange measures and increase risks for illicit uses (Cardozo and others 2024).
- Reserve composition and market impact:
  - Stablecoins are typically legally required to be backed by high-quality liquid assets such as short-term government bonds, demand deposits, and government money market funds.
  - Stablecoin issuers already hold significant volumes of short-term government debt and are among the largest buyers, putting downward pressure on US Treasury bill yields (Ahmed and Aldasoro 2025).
- Run risk and contagion channels:
  - Stablecoins may be subject to run risk; forced selling (fire sales) of reserve assets—bank cash deposits and government securities—could spill over into bank deposits and government bond and repo markets.
  - Potential consequences include increased volatility, need for central bank intervention, and direct losses if parity with the reference currency is lost.
  - Financial fragmentation in payments due to limited interoperability among stablecoins and with existing infrastructure may amplify these risks.

### Tokenization and interactions with traditional short-term instruments
- Tokenization trends:
  - Traditional instruments such as deposits and money market mutual fund shares have been tokenized as digital tokens on blockchains.
  - The tokenized market has grown substantially, although it remains small compared with stablecoins, which dominate blockchain-based payments and settlements.
  - Tokenization may enable these instruments to compete with stablecoins, and both could grow in parallel.
- Effects on Treasury bills and short-term markets:
  - The 2016 US SEC money market mutual fund reform induced a reallocation from prime MMFs to government MMFs, doubling demand for Treasury bills by nearly $500 billion while supply remained broadly stable—modestly lowering Treasury bill yields and raising commercial paper yields.
  - If stablecoins grow at the expense of money market mutual funds, yield effects may be muted because demand would be reallocated. If stablecoins displace bank deposits, demand could shift toward Treasury bills, potentially steepening yield curves and raising concerns about credit disintermediation.
  - An increase in bill issuance can mitigate price pressures, though at the cost of higher exposures to short-term interest rate risk for the government.
  - Effects depend on geographic adoption patterns, asset allocation strategies, and supply of short-term government bills.

### Corporate credit risk: resilience, vulnerabilities, and tariff-related scenarios
- Current corporate position and funding dynamics:
  - Corporate balance sheets in many countries remain healthy in aggregate despite downward revisions to profit margins since the April 2025 Global Financial Stability Report; vulnerabilities remain unresolved.
  - In the United States, interest income on assets increased more than liabilities during high-interest-rate years, lowering firms’ net interest payments—net interest payments have recently started to increase as maturing corporate debts need refinancing at higher fixed rates.
  - Firms have engaged in financial engineering rather than investing cash flow: share buybacks have grown; for example, so far this year, US financial, technology, and communications services firms have bought back near $1 trillion of stocks on an annualized basis.
  - In Japan, the ratio of share buybacks to market capitalization is on pace to reach around 2.4 percent in 2025, in contrast to 1.1 percent in 2024.
- Default and funding liquidity:
  - Default rates, especially for leveraged loans, have been climbing, though some defaults are voluntary liability management exercises, including debt exchanges.
  - Funding liquidity is strained among vulnerable borrowers.
- Tariff exposure and scenarios:
  - IMF staff analysis: for the average country, additional tariffs would reduce firms’ profit margin by 1 percentage point (green line in Figure 1.22, panel 1).
  - Cross-country heterogeneity: some countries have firms with much higher sensitivity (red bubbles) and could experience steeper erosion of margins.
  - Two extreme pass-through scenarios used to translate tariff costs into effects on earnings and debt serviceability:
    - 100 percent cost pass-through from a country’s exporters to US consumers.
    - 0 percent pass-through with equal distribution of tariff-related costs between importing and exporting firms.
  - Sensitivity analysis indicates that, as debt refinancing costs rise with large volumes of maturing debt, a sizable share of firms could end up with an interest coverage ratio (ICR) below 1, especially in countries where tariff costs are high.
  - Some countries already operating with a low percentage of risky corporate debt (debt with ICR below 1) could experience a large increase in their share, heightening credit risk.
  - Higher tariff costs would drag on macroeconomic fundamentals and could prompt firms to pass costs to consumers, potentially raising inflation.
- Risk from stagflation:
  - Elevated corporate valuations are vulnerable to “stagflation”—high-inflation and low-growth surprises—which empirically cause corporate spreads to widen and stock prices to decline, worsening corporate credit fundamentals.

### Private credit direct lending: stress and recent adjustments
- Industry resilience and pressures:
  - Elevated policy rates and uncertainty continue to exert pressure on direct lending borrowers, though the industry has shown flexibility in managing short-term pressures.
  - Continued earnings growth, declining policy rates, the use of payment-in-kind features (paying interest with additional debt), and recent restructurings have helped alleviate some cash-flow pressure for borrowers.
  - Overall interest coverage ratio remains low, but the share of borrowers with a cash-only interest coverage ratio below 1 has declined considerably, returning to pre–interest-rate-hiking-cycle levels.
- Remaining vulnerabilities:
  - Despite restructurings, liquidity remains strained among more vulnerable borrowers.

*Source: CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS (PDF chapter).*

### 1. Effective Tariff Rates versus Impact of US Tariffs on Corporate

### 1. Effective Tariff Rates versus Impact of US Tariffs on Corporate

### Sample and Methodology
- Sample includes Bangladesh, Brazil, Canada, Chile, China, Colombia, France, Germany, India, Japan, Korea, Malaysia, Mexico, the Philippines, South Africa, Spain, Türkiye, the United Kingdom, the United States, and Vietnam.
- Additional tariffs are calculated relative to January 20, 2025, and as of July 12, 2025.
- For panel 1, the impact of US tariffs on corporate profitability for a country is estimated by the interaction of:
  - the additional tariffs,
  - the share of export revenue exposed to US firms engaged in exports, and
  - the proportion of exporting firms in total, proxied by goods exports as a percentage of GDP in 2024.
- Countries are assigned numbers for both panels; countries whose companies face a larger-than-average increase in implied tariff costs (that is, greater than 1 percent of revenue) are identified as having higher sensitivity (red bubbles).
- The horizontal dashed green line in panel 1 is the simple average across countries in the sample, excluding the United States.
- Panel 2 shows the possible range of increases in debt-at-risk under varying degrees of cost pass-through scenarios for each country in the sample and higher refinancing costs.
- Debt-at-risk is defined as the share of debt with an interest coverage ratio below 1 in total.
- ICR = interest coverage ratio.

### Key Findings and Metrics
- Countries with implied tariff cost increases greater than 1 percent of revenue are categorized as higher sensitivity to US tariff impacts.
- The analysis explicitly preserves the reference dates: additional tariffs measured relative to January 20, 2025, and as of July 12, 2025.
- Debt-at-risk is measured as the share of corporate debt with ICR below 1 and is reported across countries sorted by the size of debt-at-risk as of the first quarter of 2025.
- The estimation framework relies on the interaction of additional tariffs, export exposure to US firms, and exporting intensity proxied by goods exports as a percentage of GDP in 2024.

### Interpretation and Scenarios
- Panel 1 quantifies the implied US tariff impact on corporate profit margins (percentage of revenue) and relates it to additional effective tariffs.
- Panel 2 presents a range of projected increases in debt-at-risk (percent of total corporate debt) under:
  - varying degrees of cost pass-through from tariffs to firms, and
  - scenarios with higher refinancing costs.
- Firms with interest coverage ratios below 1 are a focal point for assessing vulnerability to tariff shocks and refinancing cost increases.

### Policy Implications (tariff-related)
- Central banks should stay attentive to the risks to inflation associated with tariffs.
- Where inflation is still well above target and tariffs might constitute a supply shock, central banks need to proceed carefully with any easing and maintain their commitment to price stability mandates.
- Central bank operational independence remains critical for anchoring inflation expectations and enabling central banks to achieve their mandates.

*Source: ch1 - 1. Effective Tariff Rates versus Impact of US Tariffs on Corporate (IMF chapter PDF).*

### CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS

### CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS

### Liquidity mismatches, private credit, and investor protections
- Recommendation: Reduce incentives for investor runs by lengthening redemption frequency for funds investing in illiquid assets, including high-yield bonds; this may require amendments to legal frameworks in some jurisdictions.
- Private credit risks:
  - Broader retail participation could translate into herd behavior and redemptions during stress episodes.
  - Private credit funds should:
    - Create and redeem shares at a low frequency or require long notice or settlement periods.
    - Use liquidity management tools and conduct stress testing to assess the sufficiency of these tools during economic downturns or procyclical redemptions.
  - Securities market regulators should ensure funds permitting retail participation clearly and comprehensively disclose potential risks and redemption limitations.
  - Potential use of continuation funds would require stricter oversight.
- Supervisory coordination: Increased retail participation requires close supervision of conduct risks, as more frequent redemptions may exacerbate valuation concerns.

### Banking resilience, macroprudential policy, and financial safety nets
- Global stress-test finding: Improved capitalization is key to addressing weak banks and enhancing banking sector resilience.
- Policy priorities:
  - Implement Basel III and other internationally agreed standards to ensure sufficient capital and liquidity.
  - Review undue regulatory complexity without undermining sector resilience or international minimum standards.
  - Monitor bank exposures to NBFIs; assess solvency and liquidity implications under adverse scenarios.
  - Coordinate supervisors across financial sectors and macroprudential authorities to monitor banks and NBFIs from a systemwide perspective.
- Macroprudential buffers:
  - In countries with insufficient buffers, consider whether buffers can still be built to increase resilience while avoiding broad tightening of financial conditions.
  - Were a downturn to cause substantial financial stresses, such buffers could be released to help banks absorb losses and support credit provision.
- Financial safety net:
  - Central banks should establish frameworks for emergency liquidity assistance and stand ready to support solvent and viable banks facing temporary liquidity shortfalls, subject to strong safeguards (for example, forward-looking solvency and viability assessments, appropriate interest rates, collateralization, and appropriate haircuts).
  - All banks should periodically assess their access to central bank lending, including ability to mobilize collateral quickly.
  - Further progress on recovery and resolution frameworks is essential to manage potential shocks without systemic disruption or taxpayer exposure.

### Crypto assets and stablecoins: risks to markets and monetary sovereignty
- Potential impacts: Increasing adoption of stablecoins could affect safe-asset markets, financial intermediation, and monetary sovereignty.
- Policy recommendations:
  - Implement effective regulation, supervision, and oversight of stablecoin arrangements to mitigate financial stability and integrity risks, including stablecoin runs.
  - Adopt a comprehensive policy, legal, and regulatory response for crypto assets.
  - Implement the FSB’s high-level recommendations for crypto assets and the broader IMF-FSB policy recommendations.
  - Ensure market and prudential authorities possess adequate powers and effective risk management frameworks.
  - Implement anti-money laundering and combatting the financing of terrorism measures in line with international standards.
  - Ensure cooperation among relevant authorities.
  - Guard against excessive capital flow volatility and adopt unambiguous tax treatment of crypto assets.
  - Maintain sound macroeconomic policies and credible institutional frameworks to preserve monetary sovereignty as the stablecoin market develops.

### Box 1.1 — Commercial real estate (CRE): uneven recovery and headwinds
- Recent dynamics:
  - Global CRE prices across all regions have continued a tenuous recovery since the April 2025 Global Financial Stability Report.
  - US CRE delinquency rate (backing commercial mortgage-backed securities) rose to 7.29 percent for August 2025, driven by stress in the office sector.
  - After bottoming out in 2023, the direct CRE investment growth rate recovered to 34 percent year-over-year in the latest quarter, reaching $185 billion.
  - Investment has been buoyed by logistics, data centers, and multifamily housing; growth driven by liquid debt markets, stronger institutional demand, and increased cross-border activity.
- Heterogeneity in office markets:
  - Strong rental and leasing growth in some markets (London, Paris, Sydney, Tokyo).
  - Elevated vacancy rates in some major US cities, reflecting differences in tenant preferences and workplace adaptability.
- Forward-looking indicators and repricing:
  - Real estate sentiment: the share of investors expecting improvements in market conditions has declined recently due to concerns about market volatility, construction cost pressures, and uncertainty around funding spreads.
  - CRE market liquidity index deteriorated during the brief global market turmoil in April 2025, indicating sensitivity to broader market sentiment.
  - US CRE capitalization rates have increased in office and retail segments, implying investors will likely demand lower property prices before investing.
  - A substantial volume of US CRE debt is due to mature in a higher interest rate environment, making refinancing more challenging.

### Box 1.1 — Residential real estate: uneven recovery across countries
- Post-pandemic pattern: After a strong rise and subsequent pressure from higher rates in 2022–2023, residential real estate markets are entering an uneven recovery.
- Observations:
  - In some advanced economies, price growth has resumed modestly, supported by falling interest rates.
  - Where household leverage and debt-servicing capabilities have eased, real home prices have sometimes shown stronger growth.
  - Less-constrained borrowers are more likely to support housing demand via increased credit uptake, reinforcing price momentum; the relationship varies across countries.
- Cross-country distribution:
  - Some emerging market economies are facing extended declines in real house prices.
  - Lower debt-service burdens are associated with stronger real house price growth.

### Box 1.2 — Low interest rates in China: implications for bank profitability and lending
- Recent monetary and yield developments:
  - The People’s Bank of China has lowered the benchmark policy rate to 1.4 percent from 2.2 percent three years ago.
  - Bond yields have fallen to near historical lows.
- Profitability and margins:
  - Average net interest margins across the banking system declined to a historic low of 1.42 percent in the second quarter of 2025.
  - The deposit spread—proxied by the gap between the one-year China government bond yield and the one-year time deposit rate—compressed sharply in late 2024 as bond yields fell faster than deposit rates.
  - The loan spread (China’s one-year loan prime rate minus one-year government bond yield) has remained elevated (around 150 basis points).
  - Return on equity and return on assets for the banking sector fell to 8.2 percent and 0.63 percent in the second quarter of 2025, compared with 8.9 percent and 0.69 percent a year earlier.
- Policy responses and concerns:
  - If erosion in asset yields persists, banks’ equity bases might weaken, hindering ability to withstand negative shocks and constraining lending (the “reversal interest rates” scenario).
  - Authorities injected 500 billion yuan (or about $69 billion) of capital into large state-owned banks earlier this year to help expand lending capacity.
  - Current capital buffers at the largest banks are adequate, but loan growth at these banks has slowed below the five-year average on subdued demand.
- Selected rate references and estimates:
  - One-year time deposit rate is estimated at 0.95 percent.
  - The PBOC’s official benchmark one-year deposit rate stands at 1.5 percent, generally viewed as the ceiling.
  - The one-year lending prime rate stands at 3 percent currently.
- Implication: Policymakers face trade-offs—low rates support short-term growth but sustained low rates could weaken bank profitability and reduce lending capacity over time.

*Source: CHAPTER 1 ShIFTING GROuNd BENEATh ThE CALM: STABILITY ChALLENGES AMId ChANGES IN FINANCIAL MARkETS (PDF).*

### Box 1.2 (continued)

### Box 1.2 (continued)

### Interconnectedness of private credit and traditional institutions
- The exponential growth of private credit raises concerns that credit provision is migrating from strictly regulated banks and relatively transparent public markets to the comparatively lightly regulated and opaque private credit industry.
- The emerging financial system is marked by intertwined operations: traditional institutions (banks and insurers) and alternative nonbanks (private credit funds) are increasingly integrated rather than substitutive.
- Recent partnerships among the private credit industry, banks, and insurers highlight that cooperation can generate significant economic benefits for the parties involved.
- To realize these benefits for the broader economy, adjustments to supervisory and regulatory approaches are needed to address the buildup of risks across sectors and borders.

### Banks
- In the past decade, the private credit industry has built a sizable channel for raising long-term capital from institutional investors.
- The “patient” nature of capital in most private credit balance sheets gave it a competitive advantage in originating and retaining credit in the riskiest areas, such as leveraged finance to middle-market borrowers or subordinated debt to commercial real estate transactions—areas often avoided by strictly regulated banks.
- Several private credit managers have entered more than 20 partnerships with banks in various countries in the last three years.
- Larger private credit managers have been partnering with global banks with a wide network of clients (in particular, global systemically important banks) or smaller banks with deep expertise in a particular lending niche (for example, asset-based finance).
- Partnership objectives include:
  - Distributing private credit products to banks’ wealth management clients.
  - Creating channels for banks to offload capital-intensive assets to private credit funds, including sales of banks’ loan portfolios and synthetic risk transfers (see the October 2024 Global Financial Stability Report).
  - Providing anchor bank partners to smaller private credit managers to back their growth by providing leverage to private credit funds and strengthening lending pipelines.
- Many partnerships assume the “originate-to-distribute” model that relies on banks’ network of potential borrowers: banks earn fees for originating and servicing corporate loans and asset-based finance, which are subsequently booked in private credit funds (for example, forward-flow origination).
- Such partnerships are often complemented by agreements for banks to provide leverage to engaged private credit funds and additional banking services to private credit borrowers, including revolving lines of credit.
- Risks and open questions:
  - These partnerships have not yet been tested over time.
  - Some market participants raise concerns that the partnerships may lead to looser underwriting standards and weaker loan monitoring.

### Insurance Companies
- Private credit has long been an important component of insurers’ portfolios, especially in North America, where it represents about one-third of total investments (Figure 1.1.3, panel 1).
- Private credit instruments offer insurers additional spread for illiquidity and supply long-duration assets to match their long-term liabilities.
- Increasing exposure to private credit requires advanced asset-liability management to account for higher asset illiquidity, policy surrender risk, and single-name concentrations.
- Composition of insurers’ private credit exposure:
  - Some private credit investments represent simple credit originated by nonbank lenders.
  - A significant and growing portion is in structured instruments providing leverage to the high-yielding part of the private credit ecosystem, such as securitized products (middle-market collateralized loan obligations and commercial real estate collateralized loan obligations), fund financing through feeder notes, collateralized fund obligations, and private placements of private credit funds’ debt.
  - A growing share of insurers’ private credit exposure is sourced through either affiliated private credit managers or partnerships with private credit managers, raising concerns about potential conflicts of interest and lack of transparency (Cortes, Diaby, and Windsor 2023).
- Rating and regulatory considerations:
  - Most insurers’ exposure to private credit is classified as investment grade.
  - Many private credit instruments would be much less appealing if classified as below investment grade because investment-grade status allows favorable risk-capital treatment and supports asset-liability matching.
  - The investment-grade search has changed the rating landscape in the United States, with an increasing share of assessments being conducted by smaller rating agencies specializing in the private credit ecosystem (Figure 1.3.1, panel 2).
  - Misclassification of below-investment-grade instruments into the investment-grade bucket may result in default losses significantly exceeding those expected during an economic shock, leading to erosion of insurers’ capital and potentially causing liquidity gaps because of insufficient cash flow from defaulted entities.
  - Because reliable private ratings are key for insurers’ prudential regulation, it is imperative to keep the risk of inflated ratings minimal by ensuring the soundness of private rating assessments and requiring adequate transparency of methodologies and reports.

### Figures and data referenced
- Figure 1.1.3, panel 1 — Insurers’ private credit exposure: North America ≈ about one-third of total investments.
- Figure 1.3.1, panel 2 — Increasing role of smaller, specialized rating agencies in private credit assessments in the United States.
- Note: Panel 1 refers to Moody’s 2024. In panel 2, the “Big Three rating agencies” are Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.

*Source: Box 1.2 (continued), CHAPTER 1, Global Financial Stability Report: Shifting Ground Beneath the Calm, October 2025.*

---


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