Hedge funds with large bets on the US bond market are at risk of their trades “backfiring”, stoking financial stability risks across the world, the International Monetary Fund has warned.
In its first assessment of global markets after a sharp decline in US stocks, bonds and the dollar this month, the fund warned that financial stress among asset managers and hedge funds could spill over into the banking system if volatility persisted.
The IMF pointed to the recent climb in yields on US Treasury bonds as an example of how hedge funds with large leveraged positions were at risk of sudden falls in asset prices.
The fund said that lightly regulated hedge funds, which borrow from traditional banks, can spread turmoil across the financial system if they were forced into fire sales to raise emergency cash to meet margin calls.
“This could lead to a deleveraging in which they sell assets into a falling market, in turn causing losses for banks that provided their leverage,” according to the IMF’s bi-annual global financial stability report.
Markets have been gripped by uncertainty caused by President Trump’s tariffs this month, triggering a brutal sell-off in equities, long-term bonds and the dollar. The synchronised selling of US assets has also raised questions about the credibility of the world’s reserve asset if the White House pushes ahead with a threat of global tariffs and Trump exerts pressure on the US Federal Reserve to cut interest rates immediately.
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“Global financial stability risks have grown significantly, driven by tighter financial conditions and heightened trade and geopolitical uncertainty,” the IMF said. It added that the Fed, which controls interest rates, was facing a “challenging trade-off … in lowering inflation pressures and buttressing a slowing economy”.
The report said that “lofty” US stock prices, which hit record highs this year, were likely to fall further as “current valuation levels require persistently robust growth in earnings over the medium term, an increasingly difficult feat amid elevated economic and trade uncertainty”.
“Implied earnings remain significantly higher for companies in the United States than those in other advanced economies or emerging markets.”
