## FOREWORD

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### Current financial conditions and market outlook
- Financial conditions have eased since our April 2025 Global Financial Stability Report.
- Policy uncertainty has receded somewhat, major central banks have become more accommodative, and the US dollar has weakened.
- Equity markets have rebounded to record highs, corporate and sovereign funding spreads are at historically narrow levels, and global funding liquidity remains abundant.
- Valuations of risk assets appear stretched, especially as the global economy slows, and concentration risks in certain segments have reached historic highs.
- History reminds us that asset prices can abruptly correct following booms in the technology sector; stock market-driven wealth effects supporting strong consumption could transmit corrections to the real economy.
- Higher long-term yields on major sovereign benchmarks—most notably for US Treasuries and euro area bonds—could reverberate across the system, influencing hedging strategies and reshaping correlations with risky assets.
- Structural improvements in market resilience, including central clearing and leverage requirements, should help, although they remain a work in progress in many jurisdictions.

### Sovereign debt, fiscal risks, and the financial sector-sovereign nexus
- Many advanced economies—especially those with the most elevated debt levels—have yet to present credible strategies to stabilize rising debt trajectories, even as new spending pressures emerge.
- With more fiscal risks, a higher level of term premia could become a defining feature of global financial markets in years to come.
- One of the most troubling shifts is the potential erosion of the hedging role of longer-term bonds, exposing fragilities in the financial sector-sovereign nexus.
- Financial sector exposure to sovereign assets remains elevated across both banks and nonbanks.
- While banks globally are generally well capitalized, a vulnerable subset persists in most jurisdictions, and banks’ exposures to nonbank financial intermediaries are expanding.
- Stress in sovereign bond markets can transmit directly to banks or indirectly through nonbanks; stress tests for nonbanks in this report reveal considerable scope for sell-offs in benchmark bonds.

### Nonbank financial intermediation and market transparency
- The growing size of nonbank financial intermediation could amplify vulnerabilities by increasing risk-taking and interconnectedness in the financial system.
- A key challenge revolves around the limited visibility into balance sheets and the interconnectedness of nonbank financial institutions.
- Stronger data and disclosures are critical to diagnose vulnerabilities and guide policy responses during stress events.

### Foreign exchange markets and spillovers
- Growing macrofinancial uncertainty can strain even the highly liquid foreign exchange market (see Chapter 2).
- Such uncertainty may raise funding costs, impair liquidity, and heighten foreign exchange volatility—effects that are notably pronounced in emerging markets.
- These pressures can spill over into other asset classes, triggering broader negative feedback loops, most evident in the presence of significant currency mismatches and fiscal vulnerabilities.
- These considerations are especially relevant given US dollar softness and a substantial increase in foreign exchange hedging demand this year.

### Emerging markets and market structure innovations
- For emerging markets with strong fundamentals, a shift toward financing themselves in local currencies has stabilized bond yields and bolstered market liquidity during periods of global stress (see Chapter 3).
- Emerging markets and developing economies with weaker policy credibility and limited domestic savings remain dependent on foreign currency borrowing, and may overly rely on domestic banks to buy government bonds.
- Although funding costs remain contained for most EMDEs so far this year, new major shocks could still test their resilience.
- New financial market innovations, such as stablecoins backed by short-term government securities, have introduced new participants in sovereign debt markets and payment systems.
- In weaker economies, these developments may lead to currency substitution and reduce the effectiveness of policies, like monetary policy, and could alter bond market structure with potential implications for credit disintermediation.
- Possible runs on stablecoins may generate forced sales of reserve assets, potentially disrupting market functioning.

### Policy recommendations and priorities
- Emphasize fiscal discipline to ensure debt sustainability.
- Maintain a close monetary policy focus in line with central bank mandates; reinforcing the independence and credibility of central banks helps to anchor expectations and bolster confidence in the policy framework.
- Strengthen financial sector supervision and implement internationally agreed prudential standards, including on cryptoassets.
- Enhance reporting and oversight of nonbank financial institutions and continue efforts to improve the efficiency of local bond markets.

*Foreword by Tobias Adrian. Source: foreword (PDF).*

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