Middle East war raises financial stability risks, IMF warns.

Investing.com - The war in the Middle East is elevating global financial stability risks through inflationary pressures that could cause funding markets to tighten, potentially straining non-banks, private credit and artificial intelligence borrowers, the International Monetary Fund warned Tuesday.

In its semiannual Global Financial Stability Report, the IMF said that since February, global equity prices have declined 8% while sovereign bond yields have risen sharply, driven by a jump in energy prices and market expectations of higher inflation. The war, which led Iran to shut the Strait of Hormuz, has sent oil prices spiking.

Bond market volatility has also been spurred by rising debt-to-GDP levels and the greater issuance of short-term securities which are more vulnerable to rollover risks during rising inflation. Sharp losses in sovereign bonds could weaken bank balance sheets, while at the same time constraining governments' abilities to aid troubled banks. Hedge fund exposure to interest rate derivatives and sovereign bonds has more than doubled since 2020, rising to over $18 trillion by 2025, the IMF said.

The IMF struck a cautious tone on the $3.5 trillion private credit sector, warning that signs of more borrower defaults could cascade into broader concerns about corporate credit overall, particularly in sectors that could be disrupted by artificial intelligence. Blue Owl Capital (NYSE: OWL), Ares Management (NYSE: ARES), Apollo Global, Blackstone (NYSE: BX), and KKR (NYSE: KKR) have all limited redemptions from private credit funds as investor jitters mount.

Policymakers should ensure they are prepared to address any market dysfunction by standing up and preparing liquidity and funding facilities, the IMF said. Monetary policy should focus on price stability and policymakers should closely monitor if actual inflation begins to spill over to inflation expectations.