The International Monetary Fund (IMF) has released its Global Financial Stability Report, which warns that investors could face $US2.3 trillion of potential losses if the world’s central banks cannot smoothly unwind their quantitative easing programs (QE) carried out in the wake of the Global Financial Crisis (GFC).
According to the IMF, the losses could arise in the event that investors “took fright” at the ending of QE, and pushed-up yields on government bonds throughout the world by a percentage point, thereby causing a 5.6% ($US2.3 trillion) loss on their bond portfolios – equivalent to more than half the losses on assets faced during the height of the GFC.
Such a scenario is not the IMF’s base case, however, with the Fund expecting a more gradual unwind of QE and a return of premiums back to their pre-crisis levels by 2020 (see next chart).
According to the IMF Report:
It is important to stress that a more probable outcome would be a smooth portfolio rebalancing out of longer-duration, fixed-income assets on the back of a gradual rise in interest rates and repricing of credit risk. However, overshooting may occur as a result of any number of unanticipated events. For instance, some fund managers may seek to adjust portfolios ahead of future monetary policy tightening to avoid crystallizing losses, thereby exacerbating market volatility. Recent changes in structural market liquidity could also magnify an increase in long-term rates as financial conditions normalize.
The full IMF report is available here.
