admin Global markets rattled as tariff tensions trigger repricing of assets and rising borrowing costs
The International Monetary Fund (IMF) has warned that the global financial system is facing rising instability, largely driven by market disruptions stemming from U.S. trade policy under former President Donald Trump. In its latest Global Financial Stability Report, released during its spring meetings in Washington, the IMF noted that the repricing of risk assets triggered by escalating tariffs has led to heightened financial vulnerability across global markets.
According to the report, the sharp adjustments following Trump’s April 2nd “liberation day” tariff announcement have not only unsettled investor sentiment but also exposed deeper systemic issues. These include inflated asset valuations, overleveraged hedge funds, and increasing sovereign debt risks in emerging economies.
The IMF emphasised that uncertainty around economic policy and trade is at a record high, raising the likelihood of sudden market corrections, asset price volatility, and tighter financial conditions. “Forward-looking vulnerabilities” identified include the fragility of corporate bond markets, sovereign debt exposure, and stretched valuations even after significant sell-offs.
Concerns Over Nonbank Lenders and Leverage Risks
A notable area of concern is the growing role of nonbank lenders—such as pension and investment funds—which, despite being lightly regulated, now play a significant role in market dynamics. These entities have contributed to recent bond sell-offs by amplifying volatility through forced margin calls, the IMF said.
The Fund also warned that hedge funds, particularly those making large macroeconomic bets, are operating at leverage levels up to 40 times their asset value. Such high-risk strategies could worsen losses during market stress.
Moreover, the IMF cautioned that large international banks may be misjudging the real risks associated with their operations. Variations in the “risk-weighted asset” metrics among banks suggest that some institutions might be underestimating exposure levels, which could obscure underlying vulnerabilities.
In light of these developments, the IMF urged global regulators to enhance oversight, especially of nonbank financial entities, and to remain vigilant to prevent a cascading financial crisis.
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