Shifting Ground Beneath the Calm

The surface of global financial markets looks deceptively smooth.

Author

Gaston Brizuela Bosio
February 03, 2026 • Estimated Reading Time: 4 minutes

Volatility is low. Equity indexes are stable. Credit spreads remain compressed. But under this veneer of calm, the IMF’s latest Global Financial Stability Report warns of mounting stress. A growing disconnect between market pricing and macroeconomic risks may be sowing the seeds of the next major disruption.

The first warning sign is geopolitical and macro policy uncertainty. As Chart 1 shows, measures of economic policy, trade policy, and geopolitical risk have remained elevated throughout the past year. While these indicators briefly declined in early 2025, they have rebounded sharply amid persistent global tensions, particularly around U.S. trade policy shifts, war-related disruptions, and fiscal uncertainty across advanced economies.

Markets, however, appear to be pricing in a far more optimistic reality.

Asset prices have continued climbing in 2025, with risk assets rallying after a short-lived correction following the April 2 U.S. tariff announcement. Yet IMF models suggest that this rally could be on shaky ground. Investors have largely discounted the impact of tariffs on global growth and inflation. Simultaneously, the U.S. dollar has weakened significantly, dropping 10% this year, despite wide interest rate differentials. This divergence hints at broader shifts in FX markets and investor expectations.

The second, and more systemic, risk comes into focus with Chart 2: the IMF’s growth-at-risk framework. This model measures the probability of severe downside growth outcomes over a 12-month horizon. While median expectations remain stable, the 5th percentile tail risk has worsened, suggesting a higher chance of sharp economic contraction.

This is particularly troubling because tail risk is often where liquidity, solvency, and credit vulnerabilities materialize. The IMF’s stress testing framework estimates that 18% of global banks would fall below their minimum capital thresholds in an adverse macro scenario. That number rises to 21% if nonbank financial institutions (NBFIs), which now play a significant role in bond and credit markets, are also under stress.

Fragile Foundations

Behind the elevated growth-at-risk signal are several deeper structural shifts:

  • Sovereign debt is rising, especially in advanced economies. With fiscal deficits growing, sovereign bond issuance is increasingly reliant on price-sensitive investors. In emerging markets, the pivot to domestic currency financing reduces FX exposure but strengthens the dangerous bank-sovereign nexus.

  • Bond markets are showing cracks. Negative swap spreads, rising term premiums, and eroding convenience yields suggest that even safe haven assets are becoming more fragile. The IMF models a potential $300B forced liquidation in U.S. Treasuries by bond mutual funds in the event of a rate shock and mass redemptions.

  • Corporate resilience is uneven. While large-cap balance sheets appear healthy, a “weak tail” of firms, particularly in the leveraged loan and private credit space, are already showing signs of stress. If refinancing costs rise and trade barriers widen, as modeled in some IMF scenarios, the share of corporate debt with interest coverage below 1 could reach 55% in several economies.

Implications for Investors

For private equity, institutional allocators, and credit-focused strategies, the IMF’s warning is unambiguous: structural market calm should not be mistaken for systemic resilience.

Tail risks are rising, driven not by noise, but by real shifts in debt structure, FX behavior, policy fragility, and market plumbing. The probability of sharp corrections, liquidity squeezes, or policy missteps is higher than asset prices currently suggest.

Investors should be reassessing:

  • Duration and interest rate sensitivity of credit portfolios

  • FX mismatches across fund structures

  • Exposure to NBFI-linked instruments and shadow banking channels

  • Vulnerabilities in “mark-to-market” vehicles holding sovereign and IG debt

Conclusion

Markets are not blind, but they may be underpricing risk. Policymakers are being urged to stay vigilant. Investors should do the same. The cracks are not yet breaking the surface, but the ground beneath is shifting fast.

Sources & References