## Global Financial Stability Report — April 2026 (Selected Preface, Executive Summary, and Chapters)

## Source details

**Canonical URL:** [Global Financial Stability Report — April 2026 (Selected Preface, Executive Summary, and Chapters)](https://www.imf.org/-/media/files/publications/gfsr/2026/april/english/text.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/gfsr/2026/april/english/text.pdf.md)
- [Structured JSON version](/-/media/files/publications/gfsr/2026/april/english/text.pdf.json)

---

### Overview and key messages
- The GFSR assesses vulnerabilities the global financial system is exposed to and emphasizes vulnerability-based analysis rather than reliance on recent market performance alone.
- The global financial system has so far absorbed the war in the Middle East and the associated energy shock with a degree of resilience: markets have remained broadly orderly, corrections contained, and short-term funding markets continued to function.
- Resilience to date reflects both the unfolding nature of the shock (oscillating news and episodes of escalation and de-escalation) and more durable structural factors; however, resilience is not guaranteed and adverse scenarios could trigger amplification effects.
- Analysis reflects information available as of March 13, 2026; selected figures reflect information through April 2, 2026.

### Market developments, recent moves, and amplification channels
- Equity and bond market moves:
  - Global equity prices: decline of 8 percent since February.
  - Global sovereign bond yields: have risen sharply, driven by market expectations of higher inflation.
  - Measures of implied volatility (VIX and MOVE) have spiked.
- Market-implied inflation and rates:
  - Market-implied inflation expectations have edged up by 0.8 percentage points, as implied by inflation swap contracts.
  - Expected paths of monetary policy rates have moved higher in some cases, flipping from cuts to hikes.
- Market functioning and liquidity:
  - Global financial conditions tightened since October 2025 but remain accommodative by historical standards.
  - Market functioning has been orderly so far: bid-ask spreads have not deteriorated significantly; trading volumes in sovereign bond markets have declined modestly.
- Amplification channels documented:
  - Leverage across financial sectors (hedge funds, leveraged ETFs, option sellers).
  - Maturity and liquidity mismatches (shorter-term sovereign issuance, semiliquid private credit structures).
  - Interconnectedness, including bank–sovereign nexus and bank–NBFI linkages.
  - Price-sensitive investor concentrations that raise auction-day yield gyrations and rollover risk.

### Key vulnerabilities and medium-term concerns
- Sovereign bond markets and fiscal sensitivity:
  - At the 90th percentile, the 10-year US Treasury yield has moved by 11 basis points on auction days since 2023, compared with 6 basis points in the 2020–22 period.
  - Bid-to-cover ratios during auctions have stayed almost constant at 2.5 in the periods 2015–19, 2020–22, and 2023 to now.
  - Governments in G4 economies have reduced weighted average maturities of debt issuances over the past three years by 0.1 to 2.6 years, depending on jurisdiction.
  - Price-sensitive investors—investment funds, foreign investors, and households—hold at least half the G4 sovereign debt.
  - Rollover risk increases sovereign interest expenses and debt burden when short-term debt is rolled at higher rates.
- Sovereign–bank nexus and bank exposures:
  - In weaker emerging markets (bottom quartile of CCC or below by ratings, or unrated), bank holdings of local-currency government debt increased from 15 percent of banking system assets before the pandemic to 20 percent in 2025.
  - Under a severe loss scenario where domestic debt restructuring shaves 40 percent off sovereign bond and loan values, many banking systems (nearly half in countries rated BB/B, CCC or lower, or not rated) would see regulatory capital ratios fall below 10 percent and require recapitalization.
- Nonbank financial intermediation (NBFI):
  - Buildup of leverage across NBFIs, derivative product growth, maturity/liquidity mismatches, and rising bank–NBFI interconnectedness increase systemic vulnerability.
  - Options selling and short-dated expiries: 0DTE options now account for around 60 percent of S&P 500 options volume; on some days up to 80 percent of volume can originate from zero- to one-day expiries on US indices and ETFs.
  - Dynamic volatility strategies manage around $600 billion of assets under management.
  - Leveraged ETFs and short-gamma dealer regimes can amplify sell-offs; leveraged ETF exposure is associated with higher volatility mainly during stressed days (market returns in the 90th percentile and up).
- Private credit and corporate credit risk:
  - Roughly one-fifth of all direct-lending loans are in the software sector.
  - Under “stressed rates” or “stressed earnings” scenarios, selective default rates may increase by two to three times recent levels.
  - Some perpetual nontraded BDCs could withstand quarterly redemptions of 5 percent of NAV for approximately 9 to 11 quarters under mild stress assumptions; under moderate shock assumptions, liquidity buffers could be exhausted after five to seven quarters.
- AI-related investment and concentration:
  - Some projections suggest investment could top $3.4 trillion by 2030; IMF staff estimate hyperscalers to account for 70 percent of a projected $3.4 trillion in AI-related capital expenditure by 2029 (staff uses 2029 and 2030 horizons in different passages).
  - IMF staff estimates: of an approximately 12 percentage point increase in cumulative equal-weighted returns across AI circle firms from early September 2025 to end–December 2025, 7 percentage points can be attributed to correlation reinforcement effects within the circle, implying a contribution of $40 billion to rise in average market capitalization across these firms from a starting base of about $2 trillion over the said period.
- Concentration risk (equity markets):
  - Latest percentile values shown in the heat map: USA 97.7; KOR 99.7; DEU 93.5; GBR 78.8; JPN 72.7; FRA 55.9.
  - High concentration increases vulnerability to sector- or firm-specific shocks and can interact with funding and liquidity dynamics to amplify stress.

### Growth-at-Risk (GaR) and scenario quantifications
- Baseline:
  - Baseline mode for 2026 corresponds to 2.6 percent (Figure 1.2.1, panel 2, blue density line).
- Downside scenario (two simultaneous shocks):
  - Global financial conditions tighten about 1.1 standard deviations and stay there.
  - Global credit growth decelerates to its average before the AI boom.
  - GaR deteriorates by 1.2 percentage points relative to the baseline, falling to −0.5 percent (yellow density line).
- GaR metric:
  - Under prevailing global financial conditions, the GaR indicates one-year-ahead global growth could fall below 0.75 percent with a 5 percent probability.
  - At roughly the 35th historical percentile, the current GaR is only moderately elevated by historical standards.
- Upside scenario:
  - If the war de-escalates and energy prices normalize, global market capitalization could increase by a further 10 percent, easing financial conditions by about one standard deviation and lifting credit growth toward half its prior peak pace.

### Emerging markets: flow dynamics, investor composition, and vulnerabilities
- Cross-border portfolio flows to emerging markets:
  - Portfolio debt liabilities average about 15 percent of GDP and exceed 20 percent of GDP in one-fifth of emerging markets.
  - Portfolio equity liabilities average about 7 percent of GDP.
  - The share of NBFI in emerging market portfolio debt liabilities has doubled to 80 percent over the past two decades.
- Sensitivity to global risk (VIX):
  - One-standard-deviation increase in the VIX ≈ 7 percentage points.
  - Effects on flows to emerging markets:
    - Quarterly portfolio debt flows: decline of about 0.3 standard deviations (around 1 percent of GDP).
    - Banking flows: decline of about 0.2 standard deviations (0.8 percent of GDP).
    - Portfolio equity flows: decline of about 0.1 standard deviations (around 0.1 percent of GDP).
  - Investment funds’ debt flows to emerging markets react strongly: a one-standard-deviation VIX increase associates with a decline of more than 0.5 standard deviations (about 0.8 percent of GDP).
  - Nonresident vs resident adjustment gap after a one-standard-deviation VIX increase: 0.6 percentage points (nonresidents reduce holdings by 0.6 percentage points more than residents).
- Flighty investors and issuance effects:
  - Flighty investors (top quintile by risk sensitivity) account on average for about 1 percent of emerging market bond markets, rising to as much as 14 percent in some countries.
  - A one-percentage-point increase in ex ante reliance on flighty investors implies:
    - a 28 percent decline in the volume of sovereign debt issuance during stress episodes.
    - a 45 percent decline in the volume of corporate bond issuance during stress episodes.
  - Sovereign and corporate spreads at issuance rise by about 30 and 120 basis points, respectively, during stress episodes.
- Spillovers and balance-sheet channels:
  - Emerging market swap rates have become more sensitive to changes in the 10-year US Treasury yield than to their own government bond yields.
  - High-frequency data show portfolio outflows have been sharper than in other recent geopolitical risk events.
  - Frontier economies that issued sizable debt since early 2025 could face heightened debt sustainability challenges.

### Banking-system exposures to central government in emerging markets
- Sample coverage:
  - Panel 1 includes banking systems in 116 emerging markets; reduced-sample panels use 89 emerging markets due to data limitations.
- Simulated domestic debt restructuring (DDR) loss realizations on banks’ central government domestic-currency exposures:
  - Simulations assume uniform loss realizations of 10 percent, 20 percent, and 40 percent on face-value holdings (loans and bonds, across maturities).
  - These loss levels imply material hits to banking-system capital in many emerging markets, with interquartile ranges reported by sovereign-rating groupings.
- Rating groups referenced: EM (IG); EM (BB & B); EM (CCC or lower, unrated).

### Private credit, BDCs, and semiliquid vehicles: liquidity and stress-test findings
- Private credit and direct lending:
  - Roughly one-fifth of all direct-lending loans are in the software sector.
  - Selective defaults of direct-lending borrowers are normalizing; payment defaults are gradually rising.
  - Under stressed rates or earnings scenarios, selective default rates may increase by two to three times recent levels.
- Perpetual nontraded BDCs and semiliquid vehicle liquidity:
  - Under a moderate shock with redemptions capped at 5 percent and no new collateralized or unsecured liquidity, liquidity buffers would be exhausted after five to seven quarters.
  - Under mild stress assumptions, some perpetual nontraded BDCs could withstand quarterly redemptions of 5 percent of NAV for approximately 9 to 11 quarters.
  - Managers may impose gates before buffers are exhausted; actual redemption dynamics and manager discretion have weakened the signaling value of a 5 percent guidance.
- Corporate-credit and sectoral vulnerabilities:
  - Software sector shows concentrated refinancing risk: a large portion of software leveraged loans comes due by 2028, notably for B- and CCC-rated issuers.
  - Overall corporate credit quality has so far remained resilient due to solid earnings, with the share of firms with interest coverage ratio below 1 not worsening materially for most firms.

### Data centers, hyperscalers, obsolescence, and debt dynamics
- Data center investment and financing:
  - Sectoral inflows pushed data center inflows above an estimated $270 billion in 2025.
  - Host activity in 2025: France $69 billion; United States $29 billion; Korea $21 billion; Brazil $10 billion; Thailand $9 billion; India $7 billion; Malaysia $4 billion.
  - Since 2018, $46 billion of data center securitization issued: 70 percent ABS and 30 percent CMBS; data center securitization expected to reach $150 billion by 2028.
- Hyperscalers and AI capex:
  - IMF staff: hyperscalers expected to account for 70 percent of a projected $3.4 trillion in AI-related capital expenditure by 2029.
  - Implied useful life of hyperscalers’ PP&E around seven years; GPUs and advanced chips could face obsolescence within two years.
  - Under a three-year useful life scenario, aggregated EBIT margin would drop by more than 9 percentage points because of higher depreciation; if hyperscalers rely fully on debt financing under a three-year useful life scenario, debt levels could rise from $800 billion to more than $1 trillion.
  - A Merton-style model suggests debt-weighted average CDS spreads of hyperscalers could rise by around 60 basis points; current spread range is 20 to 160 basis points.
- Financing raised:
  - Hyperscalers have raised more than $100 billion in bond financing since January 2025, supplemented by leveraged loans and intercorporate arrangements.

### Concentration risk heat map and valuation signals
- Methodology:
  - Z-score of the Herfindahl–Hirschman Index used; panel decompositions use a three-step dividend discount model and five years of weekly data for model-implied fair-value 12-month forward P/E estimation.
- Key percentile readings (latest values shown):
  - KOR 99.7; USA 97.7; DEU 93.5; GBR 78.8; JPN 72.7; FRA 55.9.
- Implications:
  - Elevated HHI percentiles and deviations of actual 12-month forward P/E ratios from model-implied fair values indicate valuation concentration and vulnerability to sector- or firm-specific shocks, particularly in technology-tilted indices (Bloomberg AI Index; M7; S&P 500 software/hardware).

### Stablecoins and crypto-related flows to emerging markets
- Stablecoins growth and flows:
  - Gross cross-border flows in USDT and USDC rose from an estimated $12 billion in Q1 2020 to $316 billion in Q1 2025.
  - Gross flows have reached double-digit shares of annual GDP for Ukraine, Vietnam, and Belarus; net flows are just under 1 percent of annual GDP in the largest recipients.
  - Number of globally listed crypto exchange-traded products and ETFs rose from 19 in 2020 to 405 by November 2025.
- Drivers and correlations:
  - Stablecoin inflows comove with unbacked crypto activity, remittance and trade flows, higher inflation, and exchange rate volatility; inflows decrease when global funding costs are higher and increase with global risk aversion (VIX) and Bitcoin price volatility.
- Policy concerns:
  - Stablecoins can pose liquidity-transformation and run risks, spillovers to traditional finance, and currency-substitution pressures in countries with weak institutions or limited access to short-term dollar assets.
  - Proportionate, country-specific regulatory oversight and contingency planning are recommended.

### Policy recommendations (priorities and operational measures)
- Preparedness and market functioning:
  - Ensure central bank liquidity facilities are operationally ready and can be deployed swiftly; conduct periodic tests of access to central bank instruments.
  - Provide liquidity to nonbanks with appropriate guardrails.
  - Expand central clearing for government bond repos and broaden access to central counterparties; pair wider clearing with resilient margining and default-management resources.
- Monetary policy:
  - Preserve price stability; be attuned to spillovers from actual inflation to inflation expectations.
  - Where monetary policy was properly calibrated pre-shock, authorities may benefit from waiting for clarity; those with less firmly anchored expectations may need to respond faster.
  - Maintain transparent communication, operational independence, and robust accountability.
- Fiscal policy:
  - Shift fiscal stances toward appropriately tighter settings to place public debt on a stable path.
  - Discretionary support to protect vulnerable groups from the energy shock should be explicitly temporary, tightly targeted, and delivered through existing social safety nets within resource envelopes.
  - Rebuild fiscal buffers and strengthen medium-term anchors, revenue mobilization, and spending efficiency.
- Financial regulation and supervision:
  - Complete Basel framework implementation and avoid uncoordinated reviews that could increase arbitrage or weaken prudential standards.
  - Apply stress tests or scenario analyses to banks and, where possible, to NBFIs; maintain adequate capital, liquidity, and reserve buffers.
  - Close data gaps, improve cross-jurisdictional data sharing, and strengthen oversight of NBFIs, including reporting on leverage and derivative exposures.
  - Strengthen margining, collateral valuation, and counterparty credit risk management at central counterparties.
- Emerging market-specific guidance:
  - Use the IMF Integrated Policy Framework for guidance on foreign exchange intervention and capital flow management measures where appropriate.
  - Allow flexible exchange rates to facilitate adjustment; strengthen surveillance of nonresident hedge funds and leveraged investors.
  - Deepen local-currency bond markets and broaden the domestic investor base toward long-term institutional investors.
- International cooperation:
  - Enhance cross-border cooperation to address immediate and longer-term challenges, harmonize regulatory standards, fill data gaps, and support multilateral solutions.
  - A well-resourced IMF is key to assisting member countries through tailored policy advice, lending, and capacity development.

*Source: Preface, Executive Summary, Chapter 1, Chapter 2, and associated annex excerpts — Global Financial Stability Report, International Monetary Fund, April 2026.*

### Preface                                                                                                                 

### Preface

### Overview and key messages
- The Global Financial Stability Report (GFSR) assesses key vulnerabilities the global financial system is exposed to and emphasizes vulnerability-based analysis rather than reliance on recent market performance alone.
- The global financial system has so far absorbed the war in the Middle East and the associated energy shock with a degree of resilience: markets have remained broadly orderly, corrections contained, and short-term funding markets continued to function.
- Resilience to date reflects both the unfolding nature of the shock (oscillating news and episodes of escalation and de-escalation) and more durable structural factors; however, resilience is not guaranteed and adverse scenarios could trigger amplification effects.

### Structural resilience highlighted in the Preface
- Stronger starting positions for households and corporates, with cash buffers accumulated since the postpandemic recovery, provide cushioning against higher energy prices and tighter financial conditions.
- Banking sector resilience is supported by higher capital and liquidity buffers following post–global financial crisis reforms, enhancing loss-absorbing capacity.
- Major emerging markets have strengthened resilience through improved policy frameworks and more credible monetary and fiscal institutions.
- Improvements in market functioning include expanded central clearing in government bond, repo, and derivatives markets, and the availability of standing central bank facilities (examples cited: Federal Reserve’s Standing Repo Facility and the Bank of England’s Contingent NBFI Repo Facility).

### Amplification risks and remaining vulnerabilities
- The Preface stresses that circumstantial containment of market impacts does not imply vulnerabilities are benign; markets may not have fully priced adverse scenarios.
- Key amplification vulnerabilities identified:
  - Leverage across financial sectors.
  - Maturity and liquidity mismatches.
  - Interconnectedness (including bank–sovereign nexus).
  - Elevated debt-to-GDP levels and rollover risks that can make bond markets fragile, particularly on auction days.
- Specific mechanisms through which amplification could occur:
  - Larger bond yield gyrations on auction days associated with increased presence of price-sensitive investors.
  - Concentrated issuance of shorter-term securities increasing vulnerability to rollover risk and potential acceleration of yield increases beyond inflation expectations.
  - Sharp sovereign bond losses weakening bank balance sheets while governments face constraints in supporting troubled banks.
  - Emerging market sensitivity to shifts in global risk sentiment and volatile capital flows, which can lead to currency pressures and tighter domestic financial conditions.

### Emerging markets: flow dynamics and sensitivity
- Cross-border portfolio flows to emerging markets are increasingly dominated by nonbank investors, some highly sensitive to global risk conditions; this raises the risk of K-shaped capital flow patterns in periods of stress.
- The Preface notes that asset valuations in emerging markets had reached their highest level in more than a decade before the conflict, increasing susceptibility to abrupt shifts in risk appetite.
- Emerging markets may also face amplified stresses from worsening terms of trade, higher fiscal spending to address energy and food insecurities, and additional external borrowing that can weaken fundamentals.

### Policy implications and recommendations
- Policymakers should prioritize monitoring and addressing vulnerabilities (leverage, liquidity and maturity mismatches, interconnectedness) rather than relying solely on recent market calm.
- Recommended policy actions and priorities:
  - Timely monitoring of market vulnerabilities and swift action to address them.
  - Targeted macroprudential policies to mitigate risk buildup.
  - Effective crisis preparedness, including ensuring central bank liquidity facilities and backstops are operationally ready for rapid deployment to support market functioning.
  - Close monitoring and oversight of both banks and nonbanks; strengthening data collection and closing information gaps on nonbank finance.
  - Enhanced cross-border cooperation and completion of key regulatory reforms.
  - In emerging markets, use of the IMF Integrated Policy Framework for guidance on foreign exchange intervention and capital flow management measures.
  - Strengthening governance frameworks for central banks and financial sector supervisors and rigorous implementation of international standards.

### Report preparation, contributors, and data vintage
- The analysis was coordinated by the Monetary and Capital Markets (MCM) Department under the direction of Tobias Adrian, Director; project direction and leads are listed in the Preface.
- The GFSR reflects information available as of March 13, 2026.
- The report benefited from comments and suggestions from IMF staff and Executive Directors following discussions on April 6, 2026.
- In the Executive Summary and Chapter 1, selected figures reflect information through April 2, 2026 (specific figures noted include Figures ES.1; and Chapter 1, Figures 1.1 (all panels), 1.4 (all panels), 1.6 (panels 1–3), 1.7 (all panels), 1.8 (panels 2 and 3), and 1.23 (panel 1)).

*Source: Preface, Global Financial Stability Report, International Monetary Fund, April 2026.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Elevated global financial stability risks — overview
- Global financial stability risks are elevated amid the ongoing war in the Middle East, potential inflationary pressures, rising risks of further tightening in financial conditions, and several channels through which market turmoil could escalate into financial instability.
- Since February, global equity prices have declined by 8 percent.
- Emerging market assets have been strongly impacted amid a strengthening dollar and rising energy prices, especially in commodity-importing and more vulnerable countries.
- Markets have corrected in an orderly manner so far, but risks are asymmetric: the longer the conflict continues, the greater the risk that global financial conditions could tighten further and more abruptly.

### Financial market developments and amplification channels
- Equity and bond market moves:
  - Global equity prices: decline of 8 percent since February.
  - Global sovereign bond yields: have risen sharply, driven by market expectations of higher inflation.
  - Measures of implied volatility in equity and bond markets (VIX and MOVE) have spiked.
- Emerging market capital flows and investor composition:
  - Net flows data show a K-shaped pattern favoring bonds over foreign direct investment and equities (Figure ES.3 referenced).
  - Growing role of nonresident nonbank financial investors in emerging markets has increased sensitivity to shifts in global risk sentiment (Figure ES.4 referenced).
- Nonbank financial intermediaries and leverage:
  - Abrupt tightening of financial conditions can lead to forced selling by hedge funds, option sellers, leveraged exchange-traded funds, and other NBFIs that have expanded through leverage.
  - Options selling by premium-seeking investors has suppressed volatility but could amplify price swings if reversed.
  - Growing use of leveraged exchange-traded funds could result in outsized losses and heavy selling.
  - Hedge funds have increased leverage on relative-value bond trades; unwinding could magnify yield gyrations and spill over to other markets (Figure ES.5 referenced).
- Private credit and corporate credit risk:
  - Liquidity mismatches in private credit appear limited to semiliquid structures, suggesting contained systemic impact, but signs of more borrower defaults could cascade into broader corporate credit concerns.
  - Investors have accelerated the pace of redeeming investments in private credit, wary of worsening borrower credit quality.
- AI investment risks:
  - Booming investments in AI may slow significantly if the conflict persists, weighing on enterprise value of firms along the AI value chain that have increasingly relied on circular financing arrangements, with hyperscalers in the center.
  - The impact on financial stability from AI-related investment linkages appears modest currently.
  - Some projections suggest that investment could top $3.4 trillion by 2030.
- Asset class co-movement and supply shocks:
  - Simultaneous and larger sell-offs of equities and bonds occur during market downturns, reflecting more frequent supply shocks in recent years (Figure ES.6 referenced).
  - More frequent supply shocks have eroded the equity–bond hedging relationship, further raising risks of simultaneous deleveraging in both asset classes.

### Key vulnerabilities and medium-term concerns
- Sovereign bond markets:
  - High debt levels and greater rollover risks in core sovereign bond markets could accelerate the rise in bond yields and revive the sovereign–bank nexus.
- Emerging markets and frontier economies:
  - Emerging markets may face currency and capital outflow pressures as carry trades unwind and terms of trade worsen.
  - Frontier economies that have issued sizable amounts of debt since the beginning of 2025 could face heightened debt sustainability challenges.
- Nonbank financial intermediation:
  - Buildup of leverage across NBFIs and derivative products, and rising interconnectedness between banks and NBFIs, increase systemic vulnerability.
  - Closing data gaps, improving cross-jurisdictional data sharing, and enhancing oversight are critical as NBFIs grow more leveraged and more connected to banks.
- Banking sector and cross-border interconnectedness:
  - Growing cross-border interconnectedness with nonbanks raises medium-term vulnerabilities given banks’ systemic importance.
- Fiscal and structural risks:
  - Larger fiscal deficits and rising public debt could place upward pressure on long-term interest rates and tighten financial conditions.
  - Weakening institutions, including reduced central bank independence and monetary policy credibility, could de-anchor inflation expectations.
- Market functioning risks:
  - Potential strains in short-term funding markets point to needs for strengthening market infrastructure (for example, central clearing of repo transactions).

### Policy recommendations
- Market functioning and liquidity:
  - Be prepared for market dysfunction by ensuring that liquidity and funding facilities are accessible and operationally ready.
  - Enhancing bilateral and regional currency swap lines is crucial to preserve stability in funding and foreign exchange markets amid unforeseen ramifications of geopolitical events.
- Monetary policy and central bank frameworks:
  - Central banks should preserve price stability and be attuned to spillovers from actual inflation to inflation expectations, while remaining data dependent.
  - If monetary policy was already properly calibrated before the shock, monetary authorities may benefit from waiting for more clarity about its likely impact.
  - Transparent communication, central bank operational independence, and robust accountability are critical for policy credibility and public trust.
- Fiscal policy:
  - Fiscal stances should shift toward appropriately tight settings to place public debt on a stable path, with new spending focused on protecting vulnerable groups from the inflation shock.
  - Rebuilding fiscal buffers and strengthening sustainability amid high debt is urgent; support to protect vulnerable households should be temporary, targeted, and preferably delivered through existing social safety nets and within existing resource envelopes.
  - Many countries will need credible medium-term fiscal plans, stronger medium-term anchors, revenue mobilization, and improvements in spending efficiency.
- Financial regulation and supervision:
  - Completing Basel framework implementation is essential, alongside avoiding regulatory arbitrage and weakening prudential standards.
  - Strengthen market infrastructure (for example, central clearing repo transactions) to reduce strains in short-term funding markets.
  - Apply stress tests or scenario analyses to banks and, where possible, to NBFIs to assess impacts of potential illiquidity and corporate credit distress.
  - Maintain adequate capital, liquidity, and reserve buffers in line with international regulatory standards.
  - Close data gaps and improve cross-jurisdictional data sharing and oversight of NBFIs.
- Structural policies and international cooperation:
  - Accelerate structural reforms to strengthen medium-term growth and resilience, including upskilling labor, improving the business climate, streamlining regulations, enhancing competition, and strengthening supply chain resilience.
  - Accelerate energy transition to support energy diversification and security.
  - International cooperation is essential to address immediate threats from the Middle East conflict and longer-term challenges; re-anchor trade in clear, predictable rules and reduce tariff and non-tariff barriers.
  - A well-resourced Fund is key to assisting member countries, especially those most affected by the shock, through tailored policy advice, lending, and capacity development assistance.

### Executive Board views and assessment framework
- Executive Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities, noting the war in the Middle East presents a significant headwind—particularly for the conflict region, energy-importing and lower-income countries, and Fragile and Conflict-Affected States.
- Directors appreciated the reference forecast and downside scenarios as useful for preparedness across possible outcomes and stressed that the likelihood of downside scenarios depends critically on the duration, intensity, and scope of the conflict.
- Directors emphasized preserving price stability, readiness of central banks to act decisively in line with mandates, and the importance of transparent communication and central bank independence.
- Directors called for enhanced prudential oversight, scenario analysis, strengthened stress testing, closing data gaps, and maintaining adequate buffers.
- Directors reaffirmed the Fund’s role in promoting multilateral solutions and supporting member countries through policy advice, lending, and capacity development.

*Source: IMF — EXECUTIVE SUMMARY (text - EXECUTIVE SUMMARY; April 2026).*

### 0.8 percentage points, as implied by inflation swap

### 0.8 percentage points, as implied by inflation swap

### Market developments and recent moves
- Market-implied inflation expectations have edged up, with a cited change of 0.8 percentage points, as implied by inflation swap contracts in several advanced and emerging market economies.
- Expected paths of monetary policy rates have moved higher, in some cases flipping from cuts to hikes, indicating that investors see central banks potentially tightening policies to stem rising prices.
- As short-term rates have risen, expected longer-term sovereign bond yields have also risen, reflecting renewed inflationary forces combined with higher term premiums from ongoing fiscal concerns.
- The concurrent sell-off in equities and longer-term bonds in G4 economies (Japan, the euro area, the United Kingdom, and the United States) signals an erosion of safe-haven properties of these bonds amid a higher prevalence of supply shocks.
- Energy prices have spiked amid supply disruptions, alongside volatility measures and the US dollar appreciation.

### Financial conditions and market functioning
- Global financial conditions have tightened since October 2025 but remain accommodative by historical standards (Financial Conditions Indices shown in Figure 1.1, panel 6).
- Market functioning has been orderly so far: bid-ask spreads have not deteriorated significantly; trading volumes in sovereign bond markets have declined modestly.
- The deterioration of investor sentiment has been ameliorated by a still-favorable macroeconomic backdrop.
- The longer the conflict persists, the greater the likelihood that global financial conditions could tighten further, increasing financial stability risks through adverse feedback loops.

### Amplification channels and systemic vulnerabilities
- Key amplification channels documented:
  - Spikes in bond yields could be amplified by increased rollover risks and potential funding market stress, spilling over to credit markets.
  - Pressures on emerging market economies from unwinding of currency carry trades and portfolio debt outflows.
  - Equity price declines could accelerate, with potential deleveraging in option and leveraged exchange-traded fund (ETF) markets.
  - Simultaneous sell-off of bonds and equities could raise risks of deleveraging across asset classes.
- Medium-term vulnerabilities include higher concentration of sovereign debt in shorter maturities and greater dependence on price-sensitive investors.

### Bond markets, fiscal sensitivity, and rollover risk
- Expanding fiscal deficits and rising government debt had exerted upward pressure on term premiums even before the conflict.
- Advanced economies with higher government debt-to-GDP ratios (net of central bank holdings) have higher long-term forward yields and higher term premiums.
- Yield sensitivity on sovereign auction days has increased:
  - At the 90th percentile, the 10-year US Treasury yield has moved by 11 basis points on auction days since 2023, compared with 6 basis points in the 2020–22 period.
- Bid-to-cover ratios during auctions have stayed almost constant at 2.5 in the periods 2015–19, 2020–22, and 2023 to now, indicating investors demand higher yields for the same quantity.
- Governments in G4 economies have reduced the weighted average maturities of debt issuances over the past three years by 0.1 to 2.6 years, depending on jurisdiction.
- Price-sensitive investors—investment funds, foreign investors, and households—hold at least half the G4 sovereign debt.
- Rollover risk is distinctly higher as short-term debt must be rolled over at higher interest rates, increasing sovereign interest expenses and debt burden.

### Sovereign–bank nexus and bank exposures
- In weaker emerging markets (bottom quartile of CCC or below by ratings, or unrated), bank holdings of local-currency government debt increased from 15 percent of banking system assets before the pandemic to 20 percent in 2025.
- Banking systems in nearly half the countries rated BB/B, CCC, or lower, or not rated, are estimated to require recapitalization under a severe loss scenario:
  - Scenario: domestic debt restructuring shaves 40 percent off both sovereign bond and loan values.
  - Trigger: regulatory capital ratios fall below 10 percent under that scenario.
- Higher global inflation increases the likelihood of debt distress and could raise the risk of strains in both sovereigns and banks, potentially contracting lending to households and businesses.

### Emerging markets under pressure and capital flow dynamics
- Emerging market asset prices have adjusted most to the conflict outbreak: hard- and local-currency government bond spreads over US Treasuries have increased, though they remain tight by historical standards.
- Capital flows to emerging markets are increasingly imbalanced and dominated by carry-trade-driven debt portfolio flows, which could sharply reverse if global risk appetite weakens.
- High-frequency data indicate portfolio outflows have been sharper than in other recent geopolitical risk events.
- Hedge fund sensitivity to emerging market carry factors has risen, particularly for discretionary and multistrategy funds, raising the risk of sharp carry trade unwinds.
- Portfolio debt flows recorded in the balance of payments have become less correlated with debt ETF and mutual fund flows, implying a larger role for nondedicated investors.
- Emerging market swap rates have responded more to changes in the 10-year US Treasury yield than to their government bond yields, with this gap growing over time and swap rates often showing similar or greater sensitivity than bond yields to global volatility (VIX).

### Policy recommendations and measures
- Emerging market authorities should strengthen policy frameworks. Where tightening global financial conditions, carry trade reversals, and higher energy price volatility pose risks of disorderly foreign exchange movements, the IMF Integrated Policy Framework offers guidance on appropriate foreign exchange intervention and capital flow management measures, provided they support credible macroeconomic policies and necessary adjustments.
- Shift fiscal stances toward appropriately tighter settings and place public debt on a stable path in the coming years. Discretionary fiscal support to protect vulnerable groups from the energy shock should be explicitly temporary and tightly targeted.
- Complete Basel III implementation and avoid an uncoordinated review of regulations that could increase arbitrage and weaken prudential standards. Reviews aimed at reducing undue complexity and ensuring consistency with financial institutions’ systemic importance and risk profiles could be beneficial.
- As NBFIs grow more leveraged and more connected to banks, close data gaps, improve cross-jurisdictional data sharing, and enhance oversight. Expand central clearing for government bond repos and broaden access to central counterparties to address strains in short-term funding markets.
- Apply stress tests or scenario analyses to banks and, where possible, to NBFIs to assess the impact of a potential rise in illiquidity and corporate credit distress. Emphasize timely recognition of losses in loan valuations as retail and semiliquid structures gain market share within private credit.

*Source: IMF — Chapter excerpt, Global Financial Stability Report (April 2026).*

### 1. Banking Systems’ Exposure to Central Government in Emerging Markets

### 1. Banking Systems’ Exposure to Central Government in Emerging Markets

### Key findings on exposure
- Exposures refer to domestic currency loans and bonds to the central government.
- Panel 1 includes banking systems in 116 emerging markets.
- The panels are based on a reduced sample of 89 emerging markets as a result of data availability limitations for banking system regulatory ratios and exposure to the central government.
- In emerging markets, domestic debt restructuring could require sizable recapitalization.

### Simulated banking system capital under domestic debt restructuring scenarios
- The simulated DDR episodes assume a 10 percent, 20 percent, and 40 percent loss realization on banks’ holdings on central government exposure in domestic currency from a face-value haircut.
- This reduced form simulation assumes a uniform loss across all maturity buckets and across both loans and bonds.
- Interquartile ranges are reported for rating categories; emerging markets’ sovereign credit ratings are the average of ratings from three major international agencies as of December 31, 2025.
- Rating groups referenced: EM (IG); EM (BB & B); EM (CCC or lower, unrated).

### Implications and interpretation
- Domestic debt restructuring (DDR) with 10 percent, 20 percent, or 40 percent loss realizations on central government domestic-currency exposures implies material hit to banking-system capital in many emerging markets.
- The analysis underscores that uniform losses across maturity buckets and instrument types (loans and bonds) can produce wide variation in capital outcomes depending on sovereign credit-rating groupings (investment-grade, BB & B, CCC or lower/unrated).

*Source: text - 1. Banking Systems’ Exposure to Central Government in Emerging Markets (from the PDF chapter provided).*

### 4. Concentration Risk Heat Map

### 4. Concentration Risk Heat Map

### Overview and methodology
- Z-score of the Herfindahl–Hirschman Index used to construct the heat map.
- Sources: Bloomberg Finance L.P; LSEG DataStream; and IMF staff calculations.
- Decomposition in panel 1 is calculated using a three-step dividend discount model.
  - Advanced economies use a main local equity index; emerging markets use MSCI country indices.
- Panel 2 definitions:
  - Bloomberg AI Index tracks the performance of the top 45 companies in cloud computing, semiconductors, and hardware focused on the next generation of computing.
  - Magnificent Seven (M7) = Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
  - S&P 500 software = GICS Level 3 Software industry.
  - S&P 500 hardware = GICS Level 2 industry.
  - HALO = median of S&P 500 Materials, Energy, Utilities, and Industrials.
- Panel 3 compares actual 12-month forward P/E ratio with a model-implied fair-value estimate based on the previous five years of weekly data.
  - Model-implied framework described in Online Annex 1.1 of the October 2019 GFSR.
  - Final model-implied price estimate divided by 12-month forward expected earnings from IBES DataStream to arrive at the final 12-month forward P/E ratio.
- Panel 4 heatmap is based on the historical percentile of the Herfindahl–Hirschman Index; colors correspond to individual countries with ISO country codes.
- Acronyms preserved: AI; GFSR; P/E.

### Key statistics and labels shown in the figure
- Axis and chart label values included in source figures (preserved exactly):
  - Vertical axis example ticks: −80, −40, 0, 40, 80, 120
  - Country codes listed near axis region: KOR, JPN, CAN, GBR, CHE, USA, NZL, FRA, DEU, AUS, COL, ROU, BRA, HUN, POL, MEX, MYS, CHN, IND, IDN
  - Subheading: Advanced economies Emerging markets
  - Time axis ticks: Jan. 2025; Apr. 25; Jul. 25; Oct. 25; Jan. 26
  - Percentile axis ticks example: 60, 80, 100, 120, 140, 160
- Latest percentile values (data labels shown in figure):
  - USA 97.7
  - GBR 78.8
  - DEU 93.5
  - FRA 55.9
  - JPN 72.7
  - KOR 99.7
- Additional numeric labels present in figure context:
  - Sequence: 2025 1990 9520 0005 1015 (as presented in the figure)
  - Small-scale axis or marker values appearing elsewhere in the figure: 0, 5, 10, 15, 20, 25, 30
  - Panel and figure numbering and page references preserved: Figure 1.8; Figure 1.9; Figure 1.10; Figure 1.11; Figure 1.12; CHAPTER 1
- Notes and methodological numeric details preserved:
  - Five years of weekly data used for model-implied fair-value P/E estimation.
  - Panels use historical percentiles and Z-score transformations of Herfindahl–Hirschman Index.

### Findings and interpretation from the content unit
- Concentration risk is quantified using country-level Herfindahl–Hirschman Index percentiles and Z-scores, showing heterogeneity across advanced economies and emerging markets.
- Panel-level insights (as described in notes):
  - Panel 1: decomposition via dividend discount model attributes valuation drivers across jurisdictions using local/main indices or MSCI country indices.
  - Panel 2: sector- and firm-level concentration (AI Index, M7, S&P 500 software/hardware, HALO) highlighted to show technology-tilt versus heavy-asset sectors.
  - Panel 3: deviations of actual 12-month forward P/E ratios from model-implied fair values indicate valuation pressure or dispersion.
  - Panel 4: historical percentile heatmap of HHI identifies countries with relatively higher concentration risk (red) and lower concentration risk (green).
- Country-specific percentile snapshot indicates particularly high concentration percentile readings for:
  - KOR 99.7
  - USA 97.7
  - DEU 93.5
  - GBR 78.8
  - JPN 72.7
  - FRA 55.9

### Implications and risks emphasized in the chapter context
- High concentration (as reflected in elevated HHI percentiles and Z-scores) implies greater vulnerability to sector- or firm-specific shocks, especially where indexes are dominated by a few large technology firms (AI-related, M7).
- Discrepancies between actual and model-implied 12-month forward P/E ratios may signal valuation imbalances that can amplify market stress if reversed.
- Concentration in equity markets across a subset of advanced economies and emerging markets can interact with broader funding and liquidity dynamics described elsewhere in the chapter (repo market pressures, hedge fund leverage, and concentrated capital flows), raising amplification risks during periods of stress.

### Actionable considerations (policy-relevant points implicit in content)
- Monitor country-level HHI percentiles and Z-scores to detect rising concentration risk and identify jurisdictions warranting closer surveillance.
- Track deviations of actual 12-month forward P/E ratios from model-implied fair values to flag potential valuation-driven vulnerabilities.
- Pay particular attention to technology-tilted indices (Bloomberg AI Index; M7; S&P 500 software/hardware) where concentration is concentrated in a limited set of firms.
- Integrate concentration heatmap signals with funding-market indicators (repo spreads, hedge fund leverage metrics, capital flow concentration) to assess systemic amplification channels.

*Source: IMF staff (text extracted from "4. Concentration Risk Heat Map," April 2026).*

### 1. Range of Net Flows under Loose Financial Conditions Index Periods

### 1. Range of Net Flows under Loose Financial Conditions Index Periods

### Net flows and sectoral patterns
- Trailing four quarters measures are presented as percentages of GDP for net flows, resident flows, equity flows, and bond flows (figures referenced).
- Regional categories shown include: EM Asia ex. China, China, Latam, EMEA.
- Chart axes and legends include ranges such as 30 20 10 0 −30 −20 −10 −5 30 20 25 15 10 0 5 (visual scale preserved from source).

### Impact of relative returns and valuations on portfolio flows
- Impact of relative returns on equity flows and impact of relative valuations on bond flows are measured on a trailing four quarters basis; units are percentage of GDP (as labeled).
- Equity return differential versus US SPX (%) and average 10-year yield differential with respect to UST (%) are used as drivers for portfolio equity flows and portfolio debt flows (panels and labels preserved).

### Equity options, dealer hedging, and volatility amplification
- Trading of equity options has risen to close to 80 percent of the volumes in the underlying cash equity market.
- Options trading rose by 60 percentage points from a decade ago.
- Options trading involves volatility sellers, volatility buyers, and dealers.
- Dynamic volatility strategies now account for assets under management of around $600 billion.
- Zero-day-to-expiry (0DTE) options now account for around 60 percent of S&P 500 options volume, up from approximately 40 percent two years ago.
- On some days, up to 80 percent of volume can originate from options with zero- to one-day expiration on US indices and ETFs.
- New Monday and Wednesday expiries for options on mega cap technology stocks were approved for Nasdaq by the US Securities and Exchange Commission on January 16, 2026.
- Dealer gamma exposure is used to classify regimes: positive (stabilizing) and negative (amplifying); proxy-based measures suggest short gamma regimes can occur frequently and can exert net downward pressure on equity prices on those days.
- Short-dated expiries and increased prevalence of option-premium-collection strategies can make volatility supply vulnerable to rapid evaporation and procyclical hedging that amplifies sell-offs.

### Leveraged ETFs and amplification channels
- Leveraged ETFs have grown rapidly across jurisdictions, including newer crypto and single-stock products.
- Examples and sample tickers in the leveraged single-stock ETF sample: TSLA, NVDA, COIN, AMD, AMZN, APPL, ARM, GOOGL, PLTR, HOOD, META, MSFT, NFLX, and AVGO.
- Leveraged ETF channels that can amplify sell-offs:
  - Procyclical investor flows (retail behavior increases after strong returns and reduces after losses).
  - Use of derivatives by leveraged ETFs, leading dealers to hedge in underlying assets and reinforce price moves.
  - Mechanical end-of-day rebalancing to reset target leverage that creates predictable directionally aligned adjustments near the close.
- Empirical findings:
  - After controlling for market returns and stock betas, leveraged ETF exposure is associated with higher volatility primarily during periods of market stress.
  - The stressed sample includes days with market returns (absolute value) in the 90th percentile and up.
  - Within-day patterns suggest that higher leveraged-ETF exposure is associated with higher intraday volatility; Figure labels include intraday volatility (daily demeaned) in basis points and leveraged ETF exposure (basis points of stock’s market cap).
- Case example: Leveraged ETFs reportedly contributed to the KOSPI index losing 12 percent in a single day during the early days of the conflict in the Middle East (Davis and Bartholomew 2026).
- Sample period for leveraged single-stock ETFs analysis covers 2020–25.

### Private credit developments and liquidity mismatch scenarios
- Early fault lines in private credit noted, with concerns from high-profile defaults in non-direct-lending private credit and loose lending standards.
- Roughly one-fifth of all direct-lending loans are in the software sector.
- The exposure to software borrowers may exceed 50 percent of NAV (equity) for leveraged private credit vehicles.
- Direct-lending defaults: selective default levels have stabilized in some cases, while payment defaults have continued to increase from a low base.
- Stress scenarios:
  - Under a “stressed rates” scenario or a “stressed earnings” scenario, selective default rates may increase by two to three times compared with what was observed in recent years.
- Liquidity mismatch risks:
  - Some business development companies (BDCs), such as perpetual nontraded BDCs, have experienced increased redemption pressures while new investments or issuances have slowed.
  - IMF staff analysis of select perpetual nontraded BDCs suggests that under mild stress assumptions, these vehicles could withstand quarterly redemptions of 5 percent of net asset value for approximately 9 to 11 quarters.

*Source: Chapter excerpt from Global Financial Stability Report (April 2026) — figures and text as provided in the supplied content.*

### Annex 1.5). Under a moderate shock, when BDCs face

### Annex 1.5). Under a moderate shock, when BDCs face

### Liquidity stress in perpetual nontraded business development companies (BDCs) and semiliquid retail vehicles
- Under a moderate shock, when BDCs face capped redemptions, cannot attract additional collateralized secured facilities, and lack access to other sources of liquidity, liquidity buffers would be exhausted after five to seven quarters, materially limiting their ability to meet redemptions during prolonged stress episodes.
- The horizon would be much shorter if funds allow redemptions above the 5 percent threshold, as observed multiple times in recent months, or under a severe shock when borrowers draw down revolving credit lines frequently offered by BDCs and when unsecured debt of BDCs cannot be rolled over.
- Managers may impose gates well before liquidity is exhausted to avoid destabilizing the remaining portfolio; recent experience shows such actions may erode investor confidence across the broader industry.
- So far, the footprint of semiliquid vehicles in the direct-lending ecosystem is limited to about one-fifth of all direct-lending loans, but expansion to retail investors could amplify first-mover advantage dynamics and illiquidity amplification.
- Retail semiliquid vehicles typically have design features such as a quarterly redemption cap of 5 percent of net asset value, but actual redemption dynamics remain uncertain and are often subject to asset managers’ discretion and the availability of liquidity.
- Recent cases show managers have either accommodated redemptions above the 5 percent limit or gated them despite apparent balance sheet capacity, weakening the signaling value of the 5 percent guidance and complicating investor expectations.

### Stress-test findings and default dynamics in private credit and direct lending
- Selective defaults of direct-lending borrowers are normalizing, while payment defaults are gradually rising.
- Stress tests show that default rates could more than double under a scenario of sharply higher interest rates or a significant decline in earnings.
- Maturing unsecured debt and borrowers’ revolvers may crowd out liquidity available for redemptions during a shock.
- Charted stress-scenario assumptions: moderate shock considers redemptions capped at 5 percent and no additional collateralized or unsecured sources of liquidity.

### Corporate credit fundamentals and sectoral vulnerabilities
- Credit quality in the broader corporate sector has so far remained resilient on the back of solid earnings.
- The share of corporate debt among firms with an interest coverage ratio below 1 has not worsened materially in recent years for most firms in advanced economies and emerging markets.
- The key exception is companies in the software sector, where the potential AI-driven disruption has led some investors to reassess earnings durability embedded in debt, notably software leveraged loans.
- A large portion of software leveraged loans comes due by 2028, especially for B- and CCC-rated issuers, bringing refinancing risks into focus for the software sector, although the systemic impact appears contained.

### Surge in AI-related investments: concentration, circular financing, and interconnectedness
- Hyperscalers are expected to account for 70 percent of a projected $3.4 trillion in AI-related capital expenditure by 2029.
- Since 2025, circular financing arrangements within the AI stack (developers, chipmakers, and large technology firms acting as customers, investors, and financiers) have become increasingly prevalent, forging interconnectedness between listed and nonlisted AI-related firms.
- Circular financing raises opacity risks: AI-related firms within the circle may report inflated revenues, potentially detached from fundamentals, stretching equity valuations and affecting market pricing.
- IMF staff estimates: of an approximately 12 percentage point increase in cumulative equal-weighted returns across AI circle firms from early September 2025 to end–December 2025, 7 percentage points can be attributed to correlation reinforcement effects within the circle, implying a contribution of $40 billion to rise in average market capitalization across these firms from a starting base of about $2 trillion over the said period.
- Greater interconnectedness heightens concerns of systemic spillovers should an adverse shock affect even a single entity; counterfactual scenarios with higher correlations could deliver higher returns but render firms susceptible to more pronounced downturns in adverse shocks.
- Complex multidirectional channels in the circular structure could result in nonlinear amplification of adverse shocks, propagating to the wider market given the centrality of these firms and historically elevated concentration risk.

### Hyperscalers’ financing, capex demands, and obsolescence risk
- For major hyperscalers, earnings growth has kept pace with capital expenditure, with free cash flows remaining at high levels.
- Looking ahead, earnings and cash buffers could prove insufficient given the estimated $3.4 trillion in AI-related capital expenditure through 2029, potentially creating balance sheet pressures in the coming years.
- In anticipation, hyperscalers have raised more than $100 billion in bond financing since January 2025, supplemented by leveraged loans and intercorporate arrangements that are sometimes part of circular financing structures.
- Private credit financing (including insurers and asset-based finance for infrastructure debt and direct lenders for midsize firms) may also be needed to support AI deployment.
- Based on accounting depreciation figures reported by major hyperscalers, staff estimates suggest the current average implied useful life of “property, plant, and equipment” is around seven years; GPUs and advanced chips could face obsolescence within shorter horizons, which could raise future macrofinancial risks if debt increases materially.

### Amplification channel: concurrent equity and bond sell-offs
- There is a higher likelihood that equities and bonds sell off at the same time during an adverse shock, which amplifies sell-offs through forced deleveraging in both asset classes, particularly affecting risk parity and volatility-targeting funds.
- Concurrent sell-offs instill a “only cash is safe” mentality, exacerbating sell-offs across asset classes and limiting monetary and fiscal policy headroom to mitigate market turmoil.
- Historical pattern: from 2000 to 2019, when market stress (proxied by the VIX) increased, standardized expected returns for G4 equities increased as stock prices fell, while expected returns for G4 bonds declined as yields fell. In recent years, stock-and-bond co-movements have become more concurrent and larger.

*International Monetary Fund | April 2026*

### 1. Twelve-Month-Ahead Expected Returns, 2000–19

### 1. Twelve-Month-Ahead Expected Returns, 2000–19

### Expected returns, volatility (VIX), and hedging relationship
- Between 2000 and 2019, equities and bonds demonstrated a strong hedging relationship: expected returns for equities and bonds moved oppositely with the VIX (proxy for broad market volatility).
- Since 2020, this relationship changed: the expected returns of both equities and bonds now rise with the VIX, indicating concurrent falling prices.
- Confidence intervals shown: one- and two-standard-deviation confidence intervals are reported for smooth regression coefficients of equities and bond expected returns on VIX.

### Magnitude and correlation of drawdowns across periods
- 2009–2020: average equity drawdowns were around −9 percent, while Treasuries always delivered positive returns (Figure 1.19, panel 3).
- Post-2020: average equity losses during bear market episodes deepened to around −17 percent; Treasuries have frequently sold off at the same time.
- This new pattern (larger equity drawdowns and concurrent Treasury sell-offs) is robust to excluding extreme episodes such as the global financial crisis and the pandemic “dash for cash.”
- Panel 3 methodology: bear episodes defined as at least 5 percent cumulative downward correction within nonoverlapping windows, with window length no fewer than five consecutive trading days; returns included reflect peak-to-trough moves greater than 5 percent. Mean returns depicted by diamonds; medians by yellow lines.

### Construction of returns and comparisons
- Returns are constructed as consecutive overlapping 12-month holding period excess returns observed at weekly phasing.
- Excess returns are calculated over short-term risk-free rates, standardized by volatility (to arrive at Sharpe ratios).
- Profiles for the US and G4 aggregate are compared following Adrian, Crump and Vogt (2019).

### Key statistics and labels preserved from figures and notes
- Panels referenced: Figure 1.19, panel 1; Figure 1.19, panel 2; Figure 1.19, panel 3.
- Indices and acronyms retained exactly as used: S&P 500; US Treasuries; SPX = S&P 500 Index; UST = US Treasuries; VIX = Chicago Board Options Exchange Volatility Index.
- Historical periods labeled in figures: Pre-2000; Post-GFC (2009–20); Post-2020.

*Source: IMF staff calculations; Bloomberg Finance L.P.; EUROPACE AG/Haver Analytics; London Stock Exchange Group. Note: Panels 1 and 2 show smooth regression coefficients of equities and bond expected returns on VIX. Panels and notes summarized exactly as presented in the source content.*

### CHAPTER 1 GlobAl FInAncIAl MArkets conFront the WAr In the MIddle eAst And AMplIFIcAtIon rIsks

### CHAPTER 1 GlobAl FInAncIAl MArkets conFront the WAr In the MIddle eAst And AMplIFIcAtIon rIsks

### Policy recommendations amid the war and market turbulence
- Prepare for market dysfunction and limit destabilizing feedback loops given stronger amplification channels and more constrained policy space.
- Ensure sound financial safety nets and operational readiness:
  - Ensure central bank liquidity facilities are operationally ready and can be deployed swiftly to support market functioning during stress.
  - Conduct periodic tests of access to central banks’ instruments to ensure financial institutions can use these facilities.
  - Provide liquidity to nonbanks with appropriate guardrails (see Chapter 2 of the April 2023 Global Financial Stability Report).
- Enhance recovery and resolution frameworks to manage shocks without systemic disruption or extraordinary public support.
- Maintain and expand bilateral and regional currency swap lines to preserve stability in funding and foreign exchange markets.
- Monetary policy guidance:
  - Preserve price stability and be attuned to spillovers from actual inflation to inflation expectations, especially medium to long term.
  - Stand ready to tighten policy to contain second round effects; central banks with less firmly anchored inflation expectations—and that have faced persistently high inflation—may need to respond faster.
  - Central banks that expected to ease policy before the war should proceed only with robust evidence that inflation expectations remain well anchored and inflation is clearly converging back to target.
  - Central banks facing negative demand shocks may provide further accommodation while remaining attentive to price and financial stability risks.
  - Across jurisdictions, clear communication is essential to avoid excessive market reactions and to anchor inflation expectations.
- Emerging market policy responses:
  - Continue to strengthen policy frameworks and policy credibility.
  - Allow exchange rates to move flexibly to facilitate macroeconomic adjustment to shocks.
  - Use the IMF’s Integrated Policy Framework guidance on when temporary foreign exchange intervention and capital flow management measures can be appropriate, provided they support credible macroeconomic policies and necessary adjustments.
  - Strengthen surveillance and data systems to track nonresident hedge funds and leveraged investors.
  - For weaker sovereign borrowers, continue efforts to address high debt and fragile recovery with multilateral cooperation and strong international assistance.
- Fiscal policy and rollover risks:
  - Shift fiscal stances toward appropriate tightening to rebuild buffers and place public debt on a clearly sustainable path.
  - Fiscal support to protect vulnerable groups from the current energy shock should be explicitly temporary and tightly targeted, with clear sunset clauses and identified offsets.
  - Maintain an overall tight fiscal stance consistent with credible medium-term fiscal consolidation and without offsetting monetary policy.
  - Jurisdictions considering shorter-term issuance should assess rollover risks and coordinate sovereign debt management with central bank liquidity frameworks to avoid straining secured funding markets.
- Funding market stability:
  - Strengthen market infrastructure by expanding central clearing for government bond repos, especially where bilateral markets dominate.
  - Pair wider clearing with robust central counterparty risk management: resilient margining, adequate default management resources, and credible recovery and resolution plans.
  - Reform repo haircuts and margins to reduce procyclicality.
- Institutional governance:
  - Safeguard central banks’ operational independence grounded in law, with adequate institutional and financial autonomy, clear mandates, and robust accountability.
  - Ensure financial supervisors are operationally independent, adequately resourced, and endowed with sufficient legal powers to pursue financial stability objectives.
- Banking sector resilience:
  - Complete implementation of the Basel framework and avoid uncoordinated reviews of regulations that could undermine international prudential standards.
  - Review regulatory and supervisory frameworks to reduce undue complexity and ensure consistency with institutions’ systemic importance and risk profiles, while maintaining firm-level soundness and systemic stability.
  - Consider the phase of the cycle to avoid procyclicality and guard against excessive risk taking.
- Sovereign–bank nexus:
  - Strengthen systemwide surveillance and stress testing to explicitly capture sovereign risks.
  - Gradually unwind financial repression measures on banks to hold excessive sovereign debt.
  - For less-developed emerging markets, broaden and deepen local capital markets to reduce reliance on domestic banking systems for sovereign financing.
  - Where bank sovereign exposures are large, consider capital surcharges on sovereign bond holdings above specified thresholds.
  - Promote more granular and comparable disclosure of bank sovereign exposures, including by currency denomination and accounting classification.
- Nonbank financial intermediaries (NBFIs):
  - Close remaining data gaps, improve cross-jurisdictional data-sharing, and enhance oversight.
  - Improve data reporting so supervisors can account for NBFIs’ increasing leverage, interconnectedness, and liquidity risk.
  - Enhance transparency and reporting consistent with Financial Stability Board recommendations and collaborate with foreign authorities to reduce cross-border risk identification challenges.
  - Consider expanding central bank operations to address market dysfunctions linked to NBFI liquidity stress.

### Margining, central counterparties, and monitoring credit
- Margining and counterparty risk management:
  - Ensure sound margining, haircuts, and collateral valuation practices at central counterparties to limit excessive leverage and procyclicality.
  - Strengthen counterparty credit risk management, including exposure limits, stress testing, and scrutiny of NBFI liquidity risk management.
  - Enhance transparency, supervisory data sharing, and coordinated oversight of banks and central counterparties to detect systemwide vulnerabilities in repo and derivatives markets.
- Monitoring credit markets:
  - Apply stress tests and scenario analyses to banks and, where possible, to NBFIs to assess the impact of a potential rise in corporate credit distress.
  - Address weaknesses from poor lending standards, insufficient due diligence, opaque financing structures, and double-pledging of collateral.
  - Emphasize timely recognition of losses in loan valuations as retail and semiliquid structures gain market share within private credit to minimize self-reinforcing redemption pressures.

### Box 1.1 — Rising Japanese government bond yields: key facts and potential global effects
- The 40-year bond reached 4.21 percent on January 21, 2026.
- Long-dated segment increases are most pronounced; the 10- to 30-year segment is particularly steep by global comparison.
- Life insurers’ unrealized losses:
  - The largest life insurance companies in Japan—Dai-ichi, Meiji Yasuda, Nippon, and Sumitomo Life—reported a combined unrealized loss of ¥13.2 trillion ($83 billion), compared with about ¥11 trillion at the end of the third quarter of 2025.
- Domestic holdings and investor behavior:
  - The Bank of Japan remained the largest domestic holder, at 51 percent of total JGBs outstanding as of the end of June 2025.
  - Example of gradual reallocations: Nippon Life plans a ¥3 trillion shift after a ¥2 trillion rotation during the past fiscal year.
  - Pension funds usually review investment mandates about once every five years.
- Exchange rate and hedging developments:
  - Despite rising JGB yields, the yen remains historically weak; the typical positive correlation between narrowing spreads and a stronger yen has weakened in recent months.
  - The US dollar/Japanese yen cross-currency swap basis has narrowed, reducing hedging costs, but yield spreads shrunk more sharply, making yen carry trades less attractive.
- Potential spillovers to global bond markets:
  - An unwinding of yen carry trades could increase debt issuance costs and exacerbate fiscal pressures in other advanced economies where Japanese investors are large holders (notably Australia, several euro area countries, and the United States).
  - In 2025, nonresidents bought ¥13.3 trillion net of long bonds (with maturities of 10 years or longer, including over-the-counter trading of public and corporate bonds), accounting for 53 percent of all new purchases in 2025 (Japan Securities Dealers Association data as of the end of January 2026).

### Financial stability outlook and scenarios (including growth-at-risk)
- Current functioning and resilience:
  - Financial markets have so far functioned in an orderly manner amid the war in the Middle East.
  - Financial conditions have broadly tightened but market liquidity has not materially deteriorated; trading across asset classes largely continued aside from a few circuit breakers and trading halts in emerging equity markets.
  - Margin calls have reportedly been met and no major financial institutions have come under severe strains.
  - Upside forces: de-escalation of the conflict, normalization of energy prices, solid corporate earnings, and higher productivity from AI could stabilize conditions.
- Severe amplification scenario risks:
  - Prolonged war could lead to abrupt tightening of global financial conditions, deteriorating market functioning, and spiraling volatility:
    - Volatility sellers in option markets could abruptly unwind positions.
    - Leveraged exchange-traded funds facing rebalancing pressures could sell underlying assets, spiking volatility (e.g., the VIX), triggering stop-losses and further selling.
    - Repo market strains could prompt hedge funds to unwind leveraged fixed-income arbitrage trades, raising bond volatility and deterring purchases of sovereign bonds as safe havens.
    - Credit markets could seize up, potentially requiring central bank facilities to restore functioning.
    - Emerging markets—especially commodity importers and more vulnerable economies—could experience reserve drains and constrained access to international debt markets, intensifying sovereign–bank nexus and inflationary pressures.
- Growth-at-risk (GaR) assessment:
  - Under prevailing global financial conditions and current credit growth and the World Economic Outlook baseline, near-term financial stability risks are at elevated levels historically.
  - The GaR metric indicates that one-year-ahead global growth could fall below 0.75 percent with a 5 percent probability.
  - The balance of risks to global growth is tilted to the downside.
  - At roughly the 35th historical percentile, the current GaR is only moderately elevated by historical standards.
- Upside scenario quantified expectations:
  - If the war de-escalates and energy prices normalize:
    - The global equity rally would resume with market capitalization increasing by a further 10 percent—roughly half the annual gains recorded in 2023 and 2024—easing financial conditions by about one standard deviation.
    - Improved bond market stability would lift credit growth to around half its peak pace during that period.
    - Under this scenario, GaR improves (specific GaR value continuation is in the source).

*Source: CHAPTER 1 GlobAl FInAncIAl MArkets conFront the WAr In the MIddle eAst And AMplIFIcAtIon rIsks (text - CHAPTER 1 GlobAl FInAncIAl MArkets conFront the WAr In the MIddle eAst And AMplIFIcAtIon rIsks)*

### 2.6 percent (Figure 1.2.1, panel 2, blue density line).

### 2.6 percent (Figure 1.2.1, panel 2, blue density line)

### Growth-at-Risk: Baseline and Downside Scenarios
- Baseline mode of the growth forecast density accords with the April 2026 World Economic Outlook database forecast for 2026; the blue density line in Figure 1.2.1, panel 2 corresponds to a baseline growth outcome of 2.6 percent.
- Downside scenario assumptions (two simultaneous shocks):
  - Global financial conditions tighten about 1.1 standard deviations and stay there (Figure 1.2.1, panel 2, yellow dot).
  - Global credit growth decelerates to its average before the AI boom, weighed down by a global bond market sell-off and rising credit defaults.
- Impact on Growth-at-Risk (GaR):
  - GaR deteriorates by 1.2 percentage points relative to the baseline, falling to −0.5 percent (Figure 1.2.1, panel 2, yellow density line).
- Methodology notes:
  - The global conditional forecast density model augments current quarter growth and financial conditions with a proxy for global credit growth constructed as a PPP-GDP weighted aggregate of private nonfinancial sector credit growth.
  - Panel 1 shows the Global Financial Conditions Index (FCI) time series; blue marker = upside scenario level of FCI; yellow marker = downside scenario level of FCI.
  - Panel 3 traces the evolution of the fifth percentile (the growth-at-risk metric) of these forecast densities; shading intensity depicts quintiles for the GaR metric.

### Financial Conditions and Systemic Risk Indicators (Figure 1.2.1)
- Visual elements and scales shown in Figure 1.2.1:
  - Panel 1: Global Financial Conditions Index (Z-score) with values including 0, 0.1, 0.2, 0.3, 0.4, 0.5, 0.6.
  - Panel 2: Growth forecast probability density with Real GDP growth in percent on x-axis and density on y-axis; baseline mode at 2.6 percent (blue density line); downside density shown in yellow.
  - Panel 3: One-year-ahead Growth-at-Risk forecast plotted as historical percentile rank from 0 to 100 and Real GDP growth range including −2.0, −1.5, −1.0, −0.5, 0, 0.5, 1.0, 1.5, 2.0.
- Sources cited for inputs: Bank for International Settlements; Bloomberg Finance L.P.; EUROPACE AG/Haver Analytics; IMF, International Finance Statistics database; and IMF staff calculations.
- PPP defined as purchasing power parity.

### Data Centers: Investment, Financing, and Vulnerabilities
- Sector performance and demand:
  - Data centers are identified as the top-performing commercial real estate subsector, driven by AI infrastructure demand.
  - Forecasters broadly expect data center leasing to reach an all-time high in 2026.
- Investment and funding flows:
  - Demand-driven sectoral inflows pushed sectoral inflows above an estimated $270 billion in 2025 (UNCTAD 2026).
  - Country host activity in 2025 among advanced economies: France ($69 billion), the United States ($29 billion), and Korea ($21 billion).
  - Emerging market host activity in 2025: Brazil ($10 billion), Thailand ($9 billion), India ($7 billion), and Malaysia ($4 billion).
- Financing structure and gaps:
  - Since 2018, $46 billion of data center securitization has been issued: 70 percent asset-backed securities and 30 percent commercial mortgage-backed securities.
  - Both ABS and CMBS markets experienced record issuance in 2025; data center securitization expected to reach $150 billion by 2028.
  - Morgan Stanley Research estimates of data center capital expenditure through 2028 underpin financing need analysis (estimates as of July 2025); given recent hyperscaler guidance in fourth quarter of 2025, estimated expenditures through 2028 may be meaningfully higher than depicted.
  - Private bilateral credit includes credit through asset-backed financing; other capital sources include private equity, venture capital, and sovereign funding.
- Key vulnerabilities:
  - Hyperscaler tenant concentration.
  - Rapid tech-driven obsolescence.
  - Speculative development timing.
  - Capacity constraints from grid delays and labor shortages with power interconnection lead times now stretching from two to seven years.
  - Greater reliance on circular finance may inflate valuations and mask underlying demand; a sharp retrenchment in AI capital expenditure combined with procyclical credit tightening could expose data center lenders to refinancing risk and transmit stress through banks’ linkages with private credit and other nonbank financial institutions.

### Hyperscalers: Useful Life, Obsolescence Risk, and Debt Dynamics
- Implied useful life of hyperscalers’ property, plant, and equipment (PP&E) based on accounting depreciation figures reported by 10 hyperscalers is around seven years (Figure 1.4.1, panel 1).
- Obsolescence risk:
  - GPUs and advanced chips could face obsolescence within two years.
  - Under a three-year useful life scenario (versus seven years), aggregated EBIT margin would drop by more than 9 percentage points because of higher depreciation expenses (Figure 1.4.1, panel 2).
  - High capital intensity amplifies EBIT margin sensitivity; under a high obsolescence (three-year useful life) and high capital intensity scenario, aggregate EBIT margin is entirely wiped out by required new investment.
- Debt and credit spread implications:
  - If hyperscalers rely fully on debt financing under a three-year useful life scenario, debt levels could rise from the present $800 billion to more than $1 trillion (Figure 1.4.1, panel 3).
  - A Merton-style model suggests debt-weighted average credit default swap spreads of hyperscalers could rise by around 60 basis points; current spread range is 20 to 160 basis points.
  - Conclusion: Underestimation of obsolescence risks combined with greater reliance on debt financing could lead to a meaningful rise in corporate risk premium.

### Policy Implications and Recommendations (from related chapter material)
- Strengthen macroeconomic fundamentals and institutional quality, build robust fiscal and external buffers, and pursue proactive risk management consistent with the IMF’s Integrated Policy Framework to reduce volatility in cross-border portfolio flows.
- International cooperation to close regulatory gaps in nonbank financial intermediation and limit cross-border propagation and amplification of global financial shocks.
- Improve disclosure and international data sharing on nonbank exposures and vulnerabilities to strengthen market surveillance and risk management.
- Continue proportionate monitoring of the rapid expansion of private credit markets and stablecoins in emerging markets, especially where interlinkages with regulated financial institutions are material.

*Italicized source attribution: International Monetary Fund | April 2026 — Excerpts from Chapter 1 Boxes 1.2, 1.3, and 1.4 and associated figures (Figure 1.2.1, Figure 1.3.1, Figure 1.4.1).*

### Introduction

### Introduction

### Role and evolution of nonresident NBFI in emerging market financing
- Since the global financial crisis, nonresident portfolio flows to emerging markets—particularly investments in debt securities—have grown markedly compared with bank flows, constituting a key source of external financing for these countries.
- The stock of external portfolio liabilities is sizable:
  - Portfolio debt liabilities average about 15 percent of GDP and exceed 20 percent of GDP in one-fifth of emerging markets.
  - Portfolio equity liabilities average about 7 percent of GDP and represent an economically meaningful share of stock market capitalization in some emerging markets.
- The NBFI sector (including investment funds, pension funds, insurance companies, and hedge funds) now accounts for a much larger share of these portfolio liabilities:
  - The share of NBFI in emerging market portfolio debt liabilities has doubled to 80 percent over the past two decades.
  - Since the global financial crisis, the NBFI sector has grown much faster than the traditional banking sector, accounting for more than half of global financial assets in 2025.
- Benefits of increased nonresident NBFI participation:
  - Enabled emerging market issuers to place debt at longer maturities and lower costs.
  - Facilitated more efficient equity issuance, supporting investment, capital deepening, and productivity gains.
  - Contributed to price discovery, higher market liquidity, development of local yield curves, and deeper financial markets.
  - Broadened investor base has supported greater flexibility and potential resilience during stress, and encouraged adoption of stronger regulatory and disclosure frameworks.

### Vulnerabilities and channels of transmission
- Portfolio flows from nonresident NBFI are more volatile and their sensitivity to global financial conditions has increased since the global financial crisis.
- Key structural vulnerabilities in the NBFI sector that can amplify transmission of global shocks:
  - Liquidity mismatch and redemption risk in open-end investment funds that offer daily liquidity but hold relatively illiquid assets.
  - Flighty end investors and procyclical behavior, particularly among institutional clients and during stress.
  - Benchmark-driven investment (passive funds) that can generate synchronized trading and mechanical portfolio adjustments, raising the risk of sharp asset price declines and sudden stops across countries.
  - Leverage (financial and synthetic) used by hedge funds that can trigger margin calls and forced asset sales when volatility rises.
  - Interconnectedness with the broader financial system, including crypto exposures.
- Heterogeneity across NBFI types:
  - Investment funds account for the bulk of portfolio debt and equity investment in emerging markets and are exposed to redemption pressures.
  - Hedge funds have historically pulled back far more sharply during global stress episodes (for example, the 2013 taper tantrum, the COVID-19 shock, and the 2022 monetary policy tightening), reflecting higher liquidity needs, greater use of leverage, and more procyclical strategies.
  - Pension funds and insurers, which manage long-term liabilities, tend to be less procyclical but remain subject to vulnerabilities from leverage, mark-to-market accounting, and solvency rules that can force asset sales.
  - Private credit has expanded as a nonbank lender to emerging markets, with assets under management exceeding $50 billion as of the end of 2024.

### Conceptual framework and analytical focus
- The chapter develops a simple conceptual framework clarifying how global risk shocks can spread to emerging markets through the nonresident NBFI investor base, highlighting amplification channels such as liquidity mismatch, leverage, benchmark-driven flows, and investor heterogeneity.
- The analysis compares shock transmission through:
  - Nonresident NBFI versus nonresident banks.
  - Nonresident NBFI in advanced economies versus resident NBFI in emerging markets.
  - Different NBFI groups within nonresident investors (investment funds, hedge funds, pension funds, insurers).
- The chapter explores how recipient countries’ institutional and policy frameworks (external and fiscal buffers, institutional capacity, depth of domestic financial markets) shape the risk sensitivity of NBFI flows.

### Data, scope, and methods
- Data sources and coverage used in the chapter:
  - Country-level data on cross-border portfolio and bank flows from 2003 to 2025 at a quarterly frequency.
  - Security-level holdings data from 2010 to 2025 covering about 7,000 institutional investors and 4,000 mutual funds, primarily domiciled in advanced economies and investing in about 50 emerging markets.
- Empirical approach:
  - Combines information on NBFI flows and security-level holdings across sovereigns and firms to identify which investor segments are most sensitive to global financial shocks.
  - Quantifies risk sensitivity across major NBFI groups and within key investment fund segments—distinguishing institutional and retail investors, passive and active strategies, and exchange-traded funds and mutual fund structures.

*Source: Introduction, Chapter 2 — Capital Flows to Emerging Markets: The Role of Global Nonbank Investors (text - Introduction).*

### 1. Investment Funds’ Portfolio Debt Allocation to Emerging Markets by

### 1. Investment Funds’ Portfolio Debt Allocation to Emerging Markets by Strategy

### Inclusion in well-tracked indices and short-term equity effects
- Inclusion in the MSCI Emerging Markets index is associated with excess stock returns around the announcement date (day t) for events after 2000 (excluding Argentina). These events include:
  - Pakistan (June 14, 2016)
  - Saudi Arabia (June 20, 2018)
  - Kuwait (June 25, 2019)
  - Qatar (June 11, 2013)
  - the United Arab Emirates (June 11, 2013)
  - China A-shares (June 20, 2017)
- Excess returns are defined as the difference between returns of a country’s stock market index (in dollars) and the MSCI World Index (in dollars).
- Empirical window: five-day window before and after the announcement (day t).

### Trends in investment funds’ portfolio allocations to emerging markets
- Panels show total portfolio investment in emerging markets by nonresident investment funds with passive or active investment strategies.
- Time markers used in figures: t−5 t−4 t−3 t−2 t−1 t t+1 t+2 t+3 t+4 t+5 and years indicated include 2006 09 12 15 18 21 24.
- Visuals include Average and Interquartile range series for holdings by strategy (debt and equity).

### Rising NBFI exposures, private credit growth, and opacity risks
- Expansion of nonbank financing broadened options for emerging market borrowers: infrastructure finance, asset-based finance, mezzanine, and leveraged finance—particularly where bank lending has been constrained.
- Private credit funds often operate through opaque structures with limited regulatory oversight, making systemic risk assessment difficult (April 2024 Global Financial Stability Report).
- In many emerging markets, weak supervisory and data frameworks increase uncertainty about potential spillovers to domestic financial systems.

### Interconnectedness and transmission channels to banks and FX markets
- Banks in advanced economies are increasingly exposed to the NBFI sector via credit lines, repos, derivatives, and prime brokerage services, with exposures concentrated in hedge funds.
- The NBFI sector relies heavily on banks for foreign exchange swaps to hedge exposures; during global risk-off episodes, surging hedging demand can strain foreign exchange liquidity and amplify emerging market currency volatility (October 2025 Global Financial Stability Report).
- Linkages between NBFI and crypto markets are deepening, raising contagion risks:
  - Asset managers introduced a growing range of crypto-related products, including exchange-traded products and tokenized instruments.
  - NBFI entities increasingly hold crypto assets or gain exposure through crypto-sensitive securities.
  - Stablecoins are becoming more prevalent in NBFI portfolios and their use in cross-border transactions, including in emerging markets, has been growing.
  - Number of globally listed crypto exchange-traded products and exchange-traded funds rose from 19 in 2020 to 405 by November 2025.

### Sensitivity of portfolio flows to global risk (VIX) — key quantitative findings
- Global risk measure: VIX (Chicago Board Options Exchange Volatility Index).
- One-standard-deviation increase in the VIX ≈ 7 percentage points (comparable to the increase observed in early 2022 when the Federal Reserve tightened monetary policy).
- Effects on flows to emerging markets (post-2009:Q2 comparisons and overall findings):
  - A one-standard-deviation increase in the VIX is associated with a decline of about 0.3 standard deviations (equivalent to around 1 percent of GDP) in quarterly portfolio debt flows, compared with a drop of about 0.2 standard deviations (0.8 percent of GDP) for banking flows.
  - For portfolio equity flows, a similar shock implies a decline of 0.1 standard deviations—around 0.1 percent of GDP.
- Portfolio debt flows to emerging markets are more sensitive to heightened global risk than flows to advanced economies (a one-standard-deviation VIX increase yields negligible changes for advanced economies but a large and statistically significant decline for emerging markets).

### Investment funds and heterogeneity across nonbank investor types
- Investment funds investing in portfolio debt securities react almost twice as strongly as portfolio investors considered collectively:
  - A one-standard-deviation increase in the VIX is associated with a decline of more than 0.5 standard deviations of debt flows to emerging markets by investment funds—about 0.8 percent of GDP—compared with about 0.3 standard deviations for aggregate portfolio debt flows.
  - For equity flows by investment funds, a similar shock is linked to a decline of almost 0.2 standard deviations (estimate not statistically significant at conventional levels).
- Nonresident investors versus resident investors:
  - Following a one-standard-deviation increase in the VIX, nonresident investors reduce their emerging market bond and equity investments by 0.6 percentage points more than resident investors.
  - For advanced economy securities, nonresident nonbank investors do not react differently from resident investors.
- Investor-type sensitivity ranking (flightiness):
  - Hedge funds appear most sensitive, followed by other investment funds.
  - Nonresident hedge funds and mutual funds reduce emerging market investments significantly more than resident investors do during volatility spikes.
  - Nonresident insurance companies and pension funds show no meaningful adjustment on average.
  - Heterogeneity within groups: the flightiest quartile of hedge funds/mutual funds reduces holdings by more than twice the median response, while a significant share reacts less than resident holders.

### Structural vulnerabilities and amplification mechanisms
- Portfolio debt flows become increasingly sensitive to the VIX as the VIX rises: relatively unresponsive when the VIX is below its historical average of about 20 but reacting strongly at higher levels.
- Sensitivity is greater when portfolio debt flows are particularly large relative to GDP.
- Country-specific vulnerabilities increase sensitivity:
  - Weaker institutional quality, lower official reserve buffers, and higher public-debt-to-GDP ratios are associated with significantly greater sensitivity of portfolio debt flows—especially those intermediated by investment funds.
  - Lower international reserves are associated with a larger decline in nonresident NBFI investment in jurisdictions with managed exchange rate regimes.
- Structural fund vulnerabilities that amplify flightiness:
  - Redemption pressures amplified by liquidity mismatches and risk-sensitive end investors.
  - Use of leverage, triggering margin calls and liquidity spirals during volatility spikes.
  - Benchmarking against major indices and common asset holdings leading to correlated trading.
- Within investment funds, nonresident passive funds and exchange-traded funds display markedly higher sensitivity than active mutual funds.
- Strong institutions and buffers mitigate portfolio flow volatility and reduce retrenchment by nonresident investors during global risk-off episodes.

### Key statistics and exact numeric values cited
- One-standard-deviation increase in the VIX ≈ 7 percentage points.
- Historical average of the VIX used as a benchmark: about 20.
- Declines associated with a one-standard-deviation VIX increase:
  - Quarterly portfolio debt flows: about 0.3 standard deviations (around 1 percent of GDP).
  - Banking flows: about 0.2 standard deviations (0.8 percent of GDP).
  - Portfolio equity flows: 0.1 standard deviations (around 0.1 percent of GDP).
  - Investment funds’ debt flows to emerging markets: more than 0.5 standard deviations (about 0.8 percent of GDP).
  - Nonresident vs resident adjustment gap after a one-standard-deviation VIX increase: 0.6 percentage points.
- Crypto ETF listings: from 19 in 2020 to 405 by November 2025.

*Sources: Emerging Portfolio Fund Research; London Stock Exchange Group; MSCI Emerging Markets Index; Bank for International Settlements; FactSet; Lipper; IMF, Balance of Payments Statistics; IMF staff calculations; text provided from CHAPTER 2, International Monetary Fund | April 2026.*

### CHAPTER 2 cApItAl FloWs to eMerGInG MArkets: the role oF GlobAl nonbAnk Investors

### CHAPTER 2 cApItAl FloWs to eMerGInG MArkets: the role oF GlobAl nonbAnk Investors

### Sensitivity of nonbank financial investors to global risk (VIX)
- Nonresident nonbank financial investors reduce emerging market investments more than resident investors when global risk rises.
- Passive funds and exchange-traded funds (ETFs) tend to exhibit higher sensitivity to the VIX than active funds.
- Funds with institutional end investors generally experience larger outflows than retail funds when the VIX rises.
- Flighty investors—defined as the top quintile of nonresident investors by global risk sensitivity, mainly hedge funds and mutual funds—account on average for about 1 percent of emerging market bond markets, rising to as much as 14 percent in some countries.

### Fund structure, leverage, and hedging
- Investment funds use synthetic leverage and hedging, which influence retrenchment from emerging market assets during periods of elevated global risk.
- Synthetically leveraged funds hold a meaningful share of emerging market assets, with leveraged funds concentrated in equities and hedged funds mainly invested in sovereign bonds.
- Synthetically hedged funds, on average, do not reduce their emerging market investments as much as funds without identifiable synthetic exposures, consistent with hedging mitigating return volatility and redemption pressures.
- Leverage effects are more uneven and are most pronounced among exchange-traded funds, consistent with their mechanical rebalancing and reliance on margin financing, which can amplify shock transmission during stress episodes.

### Effects on asset sales, issuance, and spreads during stress episodes
- Investor redemptions in response to global risk shocks are an important driver of emerging market asset sales; institutional investors redeem from funds with emerging market exposures during periods of heightened global risk, but actively managed funds serving institutional clients can sometimes manage liquidity demands in periods of high risk with limited asset sales.
- A one-percentage-point increase in the ex ante reliance on flighty investors implies:
  - a 28 percent decline in the volume of sovereign debt issuance during stress episodes, and
  - a 45 percent decline in the volume of corporate bond issuance during stress episodes.
- Sovereign and corporate spreads at issuance rise by about 30 and 120 basis points, respectively, during stress episodes; these changes are economically sizable relative to average stress-period issuance spreads of 313 and 481 basis points.
- Sovereigns with greater ex ante reliance on flighty investors tend to increase domestic bond market issuance in response to tighter international debt market conditions; by contrast, firms do not appear able to increase issuance in domestic bond markets or syndicated loan markets, suggesting binding financing constraints.
- The total debt of firms reliant on flighty nonresident investors seems to decline in periods of stress, and exposed firms appear to reduce their capital expenditure significantly.

### Amplification, issuer vulnerabilities, and secondary market effects
- Issuers with preexisting vulnerabilities (sovereigns with above-median public-debt-to-GDP ratios, firms with above-sector-specific median total-debt-to-total-equity ratios) experience a stronger and more persistent decline in issuance volumes during stress episodes when reliance on flighty investors is greater.
- Flighty investor bases amplify price movements in stress episodes: emerging market sovereign bonds with greater initial exposure to flighty nonresident investors experienced larger price drops after the COVID-19 shock (March 6, 2020) than comparable bonds with a more stable investor base.

### Macrofinancial implications and growth-at-risk
- Reduced sovereign and corporate debt issuance and higher borrowing costs during times of stress—particularly in economies with a flightier investor base—weaken domestic demand through lower consumption and investment, increasing downside risks to future growth.
- Using the left tail (10th percentile) of the growth distribution as a measure of downside risk, the analysis finds that in economies with greater ex ante reliance on flighty investors a one-standard-deviation increase in the VIX:
  - lowers one-quarter-ahead (annualized) real GDP growth by an additional 6 percentage points relative to countries with lower reliance on flighty investors.
- The differential effect on downside growth risk remains negative for up to four quarters, on average, tapering off subsequently.

*Italic: Source: CHAPTER 2 cApItAl FloWs to eMerGInG MArkets: the role oF GlobAl nonbAnk Investors (text - CHAPTER 2 cApItAl FloWs to eMerGInG MArkets: the role oF GlobAl nonbAnk Investors).*

### Conclusions and Policy

### Conclusions and Policy

### Investor Composition and Flightiness
- Cross-border portfolio flows to emerging markets, driven largely by nonbank investors, have risen sharply since the global financial crisis.
- Sensitivity to shifts in global risk depends critically on the composition and structure of the investor base:
  - Hedge funds and investment funds react more strongly to shifts in global risk than other nonbanks.
  - Within investment funds, passive mutual funds and exchange-traded funds are generally the most sensitive to shifts in global risk.
- The share of flighty investors is constructed by estimating each investor’s sensitivity to the VIX and, for each emerging market bond market, computing the share held by the top quintile of nonresident investors with the highest sensitivity.
- Empirical result highlighted: Greater reliance on flighty investors may increase downside risks to growth (illustrated by differential impact on the 10th percentile of future real GDP growth after a one-standard-deviation increase in the VIX).

### Policy Frameworks and Resilience
- Robust policy frameworks can mitigate the impact of adverse global shocks:
  - Nonbank investors are less responsive to an increase in global risk in countries with stronger institutions, ample reserve buffers, and lower fiscal risks.
  - Strengthening fiscal positions and external buffers can reduce the risk of capital flow reversals and improve capacity to absorb external shocks, particularly where external financing needs are large.
  - Maintaining credible and robust policy and institutional frameworks is important to attract stable, long-term investors.
- Use of stress tests and proactive risk management:
  - Systemwide stress tests should gauge resilience of the domestic financial system to sudden capital flow reversals driven by nonresident investors.
  - Expand systemwide stress testing in source countries to include major nonbank financial intermediaries to assess spillovers and strengthen monitoring and mitigation of potential cross-border risks.
  - In the face of adverse financial shocks and capital flow volatility, countries should engage in proactive risk management through macroeconomic and macroprudential tools, consistent with the IMF’s Integrated Policy Framework.
- When frictions are present (destabilizing premiums from arbitrage frictions in shallow FX markets, foreign currency mismatches on corporate balance sheets, exchange rate changes that risk de-anchoring inflation expectations), the case for deploying specific macroprudential or capital flow management tools or foreign exchange intervention is strengthened.

### Liquidity, Leverage, and Fund Structure
- Flightiness of institutional investors is closely linked to structural vulnerabilities:
  - Redemption risk, use of leverage, and benchmarking practices increase flightiness.
  - Monitoring should include not only aggregate volume of flows but also composition—share held by passive or leveraged funds and extent of hedging—which shapes likelihood of synchronized outflows under stress.
- Policy recommendations:
  - Strengthen liquidity management of investment funds.
  - Enhance transparency around leverage and derivative use to mitigate correlated asset sales and improve resilience to global financial stress.

### Deepening Domestic Markets and Investor Base
- To reduce vulnerability to volatile cross-border portfolio flows, emerging markets should:
  - Deepen domestic local-currency bond markets.
  - Broaden the domestic investor base toward more developed local bond markets as a stable alternative source of financing when external funding conditions tighten.
  - Diversify investor base to include long-term institutional investors, such as pension funds, insurers, and domestic mutual funds, to mitigate amplification of global financial shocks.

### International Cooperation and Data Gaps
- International cooperation is key to limit propagation and amplification of global shocks:
  - Regulatory gaps in source countries can transmit vulnerabilities across borders because jurisdictions may not internalize cross-border spillovers of their regulatory frameworks.
  - Coordinated policy action to mitigate NBFI vulnerabilities (for example, implementing liquidity management tools for open-end mutual funds) can help contain shock transmission and reduce risk of global financial instability.
- Closing data gaps:
  - Most information on asset holdings of nonbank financial investors is collected in source countries, limiting emerging market supervisors’ ability to assess exposures across NBFI types.
  - Data gaps on leverage and exposure to derivatives constrain risk assessment.
  - Improved regulatory reporting and international data sharing would help recipient countries monitor systemic risk and source countries assess cross-border spillovers more effectively.

### Private Credit in Emerging Markets
- Private credit can support growth and deepen financial intermediation by providing bespoke credit to borrowers underserved by banks.
- Risks and recent developments:
  - Assets under management of private credit funds have expanded rapidly over the past decade.
  - Industry data suggest emerging markets account for a single-digit share of the global total (less than 5 percent), with a pace of expansion broadly comparable with advanced economies.
  - Deal activity in emerging markets rose from about $14 billion in 2024 to more than $22 billion in 2025.
  - Recent estimates place emerging market private credit assets under management between roughly $50 billion and $100 billion, representing a fivefold increase over the past decade.
  - About half of the total is attributed to India, with the rest mostly split between Latin America and China.
- Market structure:
  - Global managers tend to operate through offshore hard-currency funds raised internationally, placing FX risk on emerging market borrowers and targeting larger companies and deal sizes.
  - Domestic managers rely on locally domiciled vehicles with significant participation from domestic institutional investors and retail capital, enabling provision of local-currency credit to smaller borrowers.
- Policy and supervisory recommendations:
  - Develop stronger restructuring and insolvency regimes, clearer collateral-enforcement frameworks, and revised allocation limits for domestic institutional investors.
  - Enhance transparency on fund leverage, valuation practices, and interconnections.
  - Strengthen supervisory and data frameworks to allow timely financial stability risk assessment, especially where borrowers have weaker credit profiles.

### Stablecoins and Cross-Border Flows
- Stablecoins landscape and risks:
  - Stablecoins have grown as settlement instruments in crypto transactions and are expanding into cross-border payments and remittances.
  - Gross cross-border flows in USDT and USDC rose from an estimated $12 billion in the first quarter of 2020 to $316 billion in the first quarter of 2025, outpacing Bitcoin and Ethereum flows.
  - A large share of these flows has been directed toward emerging markets; cumulative net inflows have accelerated since late 2023.
  - Gross flows have reached double-digit shares of annual GDP for Ukraine, Vietnam, and Belarus. Net flows are considerably smaller at just under 1 percent of annual GDP in the largest recipients.
- Drivers of gross stablecoin inflows to emerging markets (empirical results from panel regression):
  - Strongest comovement with unbacked crypto activity in a country (consistent with role as settlement instruments).
  - Significant correlations with remittance and trade flows.
  - Inflows are larger for countries with weaker institutional and political stability and without access to short-term dollar assets in the form of money market funds.
  - Inflows are larger in countries with higher inflation and greater exchange rate volatility (consistent with currency-substitution motives).
  - Inflows significantly comove with global financial and crypto market conditions:
    - Inflows decrease when global funding costs are higher (reflecting tighter dollar liquidity and higher opportunity costs).
    - Inflows increase with global risk aversion (measured by the VIX) and Bitcoin price volatility.
- Stability concerns and policy priorities:
  - Absent adequate regulation and backstops, stablecoins may pose risks to macrofinancial stability through liquidity transformation and run risk, potential spillovers to traditional financial markets and the real economy, and currency substitution that can hamper monetary policy transmission.
  - Policy priorities should remain proportionate, country specific, and embedded within broader efforts to strengthen oversight of nonbank credit intermediation.
  - Enhanced regulatory oversight and contingency planning are warranted as stablecoins scale relative to a country’s macroeconomy and become more integrated with the broader financial system.

*Conclusions and Policy — Chapter content from the source PDF.*

### Annex 2.6 for additional details. AEs = advanced economies; BTC = Bitcoin; EMs = emerging markets; ETH = Ethereum; FX = 

### Annex 2.6 — Box 2.2 (continued): Stablecoins and Policy Implications

### Key findings on stablecoins and global linkages
- Stablecoins can exhibit safe-haven behavior similar to that observed for the dollar (October 2025 Global Financial Stability Report).
- Such linkages could strengthen the cross-border transmission of global financial shocks and crypto shocks.
- Progress on supervisory frameworks for stablecoins has remained slow and fragmented, in part reflecting limitations in existing regulatory mandates and tools, as well as the cross-border nature of stablecoin activity.
- For details on progress, see FSB (2025b).

### Prudential and supervisory implications
- Proportionate oversight of stablecoin access and exposures by relevant intermediaries and financial institutions is needed.
- Robust anti–money laundering/combating the financing of terrorism measures consistent with international standards can help mitigate relevant risks.

### Cross-border coordination and data needs
- Close international coordination is needed to:
  - address spillover risks;
  - harmonize regulatory standards to limit regulatory arbitrage;
  - fill in data gaps; and
  - maintain open channels for effective supervisory and policy dialogue.

### Macroeconomic and structural considerations
- Sound macroeconomic policies alongside continued financial system development are essential to address macro fragilities and structural frictions that may lead to currency substitution pressures.

*Source: Annex 2.6 (Box 2.2 continuation) — GLOBAL FINANCIAL STABILITY REPORT, April 2026.*

---


_Source: https://www.imf.org/-/media/files/publications/gfsr/2026/april/english/text.pdf_