GLOBAL MARKET/OPINION: IMF: Fiscal Concerns Impacting Term Premia, Swap Spreads
Oct-14 18:49
The IMF's latest Global Financial Stability Report (PDF here) expresses concern over the state of global risk assets. "Markets appear to downplay the potential effects of tariffs on growth and inflation. IMF staff models show that valuations of some risk assets have once again become stretched after the brief correction from the April 2 tariff announcement by the United States."
- Much of the attention on the report (at least as seen in headlines) regards elevated equity markets, particularly in the US, though actually the IMF staff suggests that while valuations "appear stretched relative to fundamentals.... current overvaluation is still below historical peaks" including the dot-com bubble. And "The IMF’s updated growth-at-risk (GaR) assessment reveals that near-term downside risks to financial stability have declined since the April 2025 Global Financial Stability Report, albeit slightly."
- But the report highlights the long shadow cast by advanced economies' debt trajectories. In particular the IMF points out risks of rising term premia on government bonds: "With more fiscal risks, a higher level of term premia could become a defining feature of global financial markets in years to come."
- The report also points out the related steepening of G4 yield curves and widening of swap spreads, the latter of which is "broadly capturing rising credit risk and funding pressures in the financial system, has been increasingly driven by fiscal considerations, exhibiting strong co-movement with the projected average budget balance over the next five years". These dynamics are highlighted in the accompanying chart (Figure 1.9 in the report).
- There's a near-term financial stability angle to all this: "Although sovereign bond markets in major advanced economies have stabilized since the abrupt sell-off prompted by the April 2 tariff announcement, steepening yield curves, more negative swap spreads, and the erosion of convenience yields indicate that bond market functioning is on shakier footing. Bond market functioning could be tested if yields rise abruptly".
- Unsurprisingly from the IMF, the recommendation is that "Urgent fiscal adjustments to reduce deficits are crucial to protect the resilience of sovereign bond markets."
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
AUSSIE 3-YEAR TECHS: (U5) Bounces Further Off Support
Sep-12 21:45
- RES 3: 97.190 - High May 5 2023
- RES 2: 96.932 - 76.4% of Mar-Nov ‘23 bear leg
- RES 1: 96.860 - High Apr 07
- PRICE: 96.550 @ 15:36 BST Sep 12
- SUP 1: 96.430/95.900 - Low Sep 3 / Low Jan 14
- SUP 2: 95.760 - Low 14 Nov ‘24
- SUP 3: 95.480 - Low Jan 11 2023 and a major support
Aussie 3-yr futures are trading off recent lows. A resumption of gains from here would further narrow the gap with resistance at 96.730, the Sep 17 ‘24 high, leaving 96.860 as the next key level. Any continuation lower would instead strengthen a bearish threat. This would refocus attention on 95.760, the 14 Nov ‘24 low. Conversely, a reversal higher would open 96.860, the Apr 7 high.
FED: MNI Fed Preview-September 2025: A Reluctant Return To Easing
Sep-12 21:16
We've published our preview of the upcoming FOMC meeting - Download Full Report Here
- The Federal Reserve is set to resume its easing cycle at the September 16-17 meeting with a 25bp cut to the funds rate range to 4.00-4.25%.
- The decision to cut after a 5-meeting pause was well-telegraphed by Chair Powell, whose Jackson Hole speech described a “shifting balance of risks” toward a weaker labor market that “may warrant adjusting our policy stance”.
- The updated quarterly projections aren’t likely to bring many changes to the macroeconomic variables, but as usual the signal sent from the Fed rate “Dot Plot” will garner attention. A Committee split between expecting one or two further cuts this year is likely, keeping each of the remaining meetings of 2025 “live”.
- The Statement will downgrade the description of the labor market to reflect a rise in the unemployment rate and poor payrolls growth, and is likely to include at least one dissent to the rate decision.
- But with a Committee that is fairly divided on the way forward, Powell will be noncommittal on future action, reiterating that policy is not on a preset course, and upcoming decisions will be data-dependent.
- A key undercurrent is an increasingly activist approach to Fed personnel management from the White House, which leaves the composition of the FOMC uncertain not just over the medium-term but also at this meeting.
MNI’s separate preview of sell-side analyst summaries to follow on Monday Sep 15
RATINGS: Fitch: France Cut To A+ From AA, Portugal Up To A From A-
Sep-12 21:07
Fitch has downgraded France's sovereign rating to A+ (with stable outlook) from AA-. Release here.
- Among other factors in the decision, Fitch cites "High and Rising Debt Ratio", "Political Fragmentation Hinders Consolidation", "Weak Fiscal Record", "High 2025 Deficit", "Uncertain Fiscal Consolidation Path", and "Fiscal Rigidities".
- In "Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade", Fitch cites "Public Finances: A sustained increase in government debt/GDP over the medium term, due to failure to implement fiscal consolidation measures and/or a persistent increase in financing costs" and "Macro: Materially lower economic growth prospects and weakened competitiveness." Conversely, potentially leading to positive ratings action would be "Public Finances: Confidence that government debt/GDP will be put on a downward trajectory over the medium term, for example, due to fiscal consolidation and/or stronger economic growth".
- Fitch also raised Portugal to A (stable outlook) from A-, while elsewhere, S&P raised Spain to A+ (stable outlook) from A.
- As MNI wrote earlier, we expected France to be downgraded to A+ and Portugal to be upgraded to A.
