International Monetary Fund warns on the impact of high bond yields

  • Meanwhile, in its semi-annual Global financial stability report, the IMF warned that the recent sharp rise in bond yields, even if partially reversed, could pose a threat to financial market stability. The IMF’s head of monetary and capital markets said that “when you see large moves that are very fast, it has more potential to trigger instability, because market participants have to reposition and there are these accelerators in the system that could kick in. Hopefully, calm will prevail at some point, but there is certainly heightened risk [now].” He urged regulators in member countries to be alert to potential risks. 

Higher bond yields have the potential to create problems for medium-sized commercial banks. In some cases, higher yields will require that asset values be downgraded due to mark-to-market requirements. In addition, higher yields could cause an increase in defaults on commercial property mortgages. This, too, would have a negative impact on some banks. The IMF warned that this could lead to an “adverse feedback loop” in which declining asset values cause a seizing up of credit markets. 

On the other hand, US Treasury Secretary Yellen said that higher yields have, so far, not created any dysfunction in financial markets. She said, “I haven’t seen any evidence of dysfunction in connection with the increase in interest rates. When rates are more volatile, sometimes you see some impact on market function, but that is pretty standard.” Yields had especially risen following last week’s release of an unexpectedly strong jobs report. Yet Yellen said the report was good news, not bad news. Moreover, she noted that, despite strong demand for labor, wage inflation has abated somewhat while core inflation continues to be “well-behaved.” She said that the strong job growth was related to an increase in participation, not necessarily overheating in the labor market. 

Finally, the IMF appears to be leaning against the prevailing wisdom of investors. That is, while many investors are starting to expect the Federal Reserve to limit monetary-policy tightening. The IMF’s chief economist called on the Fed to stay the course. Pierre Olivier Gourinchas said