International Monetary Fund Warns of Elevated Market Risks
The IMF October 2025 Global Financial Stability Report warns that underlying vulnerabilities are elevated despite calm markets. The Fund highlights three interlinked risks: stretched asset valuations, the influence of non-bank financial institutions (NBFIs), and rising sovereign bond market pressures.
Why this matters
Valuation risk
Risk-asset prices are well above fundamentals. This increases the probability of a sudden correction. The recent market rebound may mask latent fragility.
Non-bank instability
NBFIs such as hedge funds and private credit are less regulated and heavily leveraged. A shock to these entities could transmit rapidly to the banking sector. Many banks have significant exposure to NBFIs.
Sovereign pressure
Elevated sovereign debt levels and rising bond yields represent a structural weakness. If liquidity dries up, sovereign stress could reinfect banks. Many jurisdictions have limited fiscal buffers.
Liquidity mismatches
Large foreign exchange markets remain vulnerable to disruptions. Dealer concentration and global funding mismatches create hidden fault lines.
What to watch
Volatility measures
The IMF flags current low volatility as a sign of complacency. A sudden spike in the VIX or the MOVE index (bond volatility) would indicate that stretched valuations are finally correcting to match economic reality.
Private credit stress
Trouble often emerges first in the opaque non-bank sector. Widening spreads or halted redemptions in private credit funds would signal that leverage risks are materializing.
Policymakers and regulators
Monitor NBFI growth, transparency gaps, cross-border contagion channels. Consider macroprudential responses before crisis hits.
Sovereign yield moves
Bond markets remain the primary transmission channel for risk. Sharp, unexplained rises in sovereign yields would suggest that debt sustainability concerns are overriding standard monetary policy signals.
