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Asset Valuations: Asset price mis-alignments can act as a significant amplifier of market stress events, and thus are critical for both investors and issuers. I have worked on models across asset classes including
EM Hard Currency Bond Spreads (contingent on domestic fundamentals and external financial conditions)
EM Local Currency Bond Yields (contingent on domestic fundamentals and external financial conditions)
Sovereign Bond Term premia, across 21 biggest countries
Equities (biggest AEs and EMs)
Working paper is under progress on 1) , 2) and 3); available on request
Drivers of US yields into real and inflation risk premia: The recent rise in long-term U.S. interest rates has become a focus of global macro-financial concerns. It is reflecting, in part, an improving US economic outlook amid strong fiscal support and the recovery from the #COVID19 shock. But other factors, like economic and fiscal uncertainty, may also be playing a role. We note that, while inflation expectations are driving near-term yields, long-term yields are driven primarily by a sharp rise in real risk premia. This has policy implications with regard to global spillovers, and also underscores the crucial role of the Fed's forward guidance about the future stance of monetary policy.
Yield curve slope and the growth-at-risk: Yield curve inversions have historically been preceded by a recession. We investigate this relationship due to the latest YC inversion, through the lens of our growth-at-risk framework. The downside risks to growth screen at almost -4.6%, as compared to -2.3% in the baseline. While the median forecasts of GDP growth remain consistently in a relatively narrow range, the left tail of the distribution also decreases significantly ahead of recessions - something we saw in H2 2019.
IMF Blog Link: The Slope of the US Yield Curve and Risks to Growth
Box 1.1 in GFSR October 2018, authored by Benson Durham
Maturing credit cycle in advanced economies: We were one of the first OFIs to escalate the issue of maturing credit cycle in 2017-beginning, focusing primarily on the trends in the US non-financial corporate sector. Under an adverse scenario, an unproductive fiscal expansion could lead to a sharp rise in borrowing costs. This could further compromise the ability of firms to service their debt with the assets of challenged firms reaching almost $4 trillion. The number of firms with very low interest coverage ratios—a common signal of distress—could also rises to 22 percent under the assumed interest rate rise. This topic has since attained significant attention globally, and also been covered in the subsequent editions of GFSR.
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