A growing shortage of safe assets poses a new threat to global financial stability, the International Monetary Fund warned on Wednesday.
Sovereign debt crises are reducing the number of governments that investors trust to issue "risk-free" bonds just as new financial regulations are increasing demand for safe securities from banks.
The report shows how reforms in the wake of the 2007-09 crisis may create new pinch points in the global financial system that could cause trouble in the future.
"Safe-asset scarcity could lead to more short-term volatility jumps, herding behaviour, and runs on sovereign debt," said the IMF in a chapter of its new Global Financial Stability Report. "In the future, there will be rising demand for safe assets, but fewer of them will be available, increasing the price for safety in global markets."
Safe assets play a range of roles in financial markets. Government bond yields are used to price other assets, banks and insurers hold highly-rated bonds as buffers of capital and liquidity against times of crisis, and they are used as collateral against derivatives and short-term loans.
If there were a shortage of safe assets, it could exacerbate a future financial crisis as investors scrambled for the limited supply available, pushing their prices ever higher.
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