BIS warns of fiscal risks as hedge funds take on government loans

The Bank of International Settlements (BIS) has warned that the disconnect between record global stock prices and increased government debts risks financial stability. The bank’s survey shows that inflation remains high even after the COVID-era price increases. 

The BIS serves as the supporting arm for the world’s central banks. It cited the rise in premiums required by investors to hold 30-year government bonds in major economies as a sign of mounting concerns about the fiscal outlook. The arm suggested that the growing role of hedge funds in absorbing government debts also poses potential stability risks in the market. 

BIS warns of fiscal risks as hedge funds take on government loans

Moody’s, a U.S. credit rating firm, stripped the American government of its AAA status earlier this year. Fitch also downgraded France to a record low last week. According to a Reuters report, BIS highlighted that this downgrade shows the scale of fiscal challenges targeting advanced economies amid stocks that continue to record higher prices. 

Hyun Song Shin, head of the BIS’s Monetary and Economic Department, gave the warning that financial markets may face trouble even before measures put in place could be triggered. He noted the increased rate of hedge funds taking on government debts, saying it could potentially amplify the problems. He warned that this is the time to be watchful of potential amplification channels that could propagate stress. 

Despite the risks highlighted, the BIS revealed little to no sign of global investors shifting their focus decisively from the U.S. asset market. It noted that some non-U.S. investors sold large stakes of U.S. bonds and equities in April and largely reversed in May and June. The bank suggested that global investors’ holdings of U.S. assets, combined with the slow portfolio allocation changes, mean any shift away would be gradual. 

The BIS has also published the first results of the latest Global Public Inflation Expectations survey. The survey covers thirteen advanced and eighteen emerging economies and revealed that the post-pandemic price increase confirms continued inflation expectations in the long term, particularly in countries that face price spikes. According to the survey, temporary inflation shocks are a risk that leaves a lasting challenge to public expectations. It also noted that most households continue to support the independence of central banks from governments. 

BIS sees elevated asset risks, urging vigilance in a fragile economy

Shin highlighted a slowdown in the real economy, especially the U.S. labour market, citing concerns about the sustainability of stock market valuations. He said the equities market continues to post results last seen during the dot.com bubble, while corporate bonds remain unusually tight. 

The umbrella group for central banks flagged unusual moves in the currency market, noting that July’s dollar coincided with strong equity gains. The bank said the pattern does not align with traditional interest rate dynamics. Shin warned that the potential outcome of such ample financial conditions should be examined keenly. The BIS urged policymakers and investors to remain vigilant as elevated valuations of risky assets leave the global economy vulnerable to sudden corrections. 

Meanwhile, the U.S. tariff landscape continues to unfold major developments with no clear impact highlighted in the report. Cryptopolitan recently reported on how U.S. tariffs are affecting the petrochemicals market. The intensified pressures in the sector have forced China to redirect exports from the U.S. to Asian markets, which has led to oversupply and overcomplicated supply chain planning, according to the report. 

Ganesh Gopalakrishnan, TotalEnergies’ head of petrochemical trading, warned that if the tariffs continue, trade volumes may drop by another 15% after experiencing a 34% decline over the past five years. He highlighted that traders lacking the production facilities are at a greater struggle in the supply glut. 

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