Demand for so-called "safe-haven" assets has been rising, driven by regulatory changes and investors' reduced risk appetite. However, the supply of safe assets is dwindling because of the fall in the number of AAA-rated countries and the drying up of the securitisation market, the Washington-based institution said.
The IMF said the drop in the number of countries whose sovereign debt qualified as "safe" would reduce the supply of safe assets by $9 trillion (£5.5 trillion) from 2016 – equivalent to 16pc of the total.
"Safe asset demand is expanding at the same time the universe of what is considered safe is shrinking," the IMF said in a chapter of its Global Financial Stability Review released ahead of the full publication next week.
The imbalance could lead to "more short-term volatility jumps, herding behaviour and runs on sovereign debt", it added, and "[increase] the price for safety in global markets".
Higher prices could force investors to buy riskier assets. "The tightening market for safe assets can have considerable implications for global financial stability, including an uneven or disruptive pricing process for safety," the report said. As investors try to find "scarce safe assets, they may be compelled to move down the safety scale, prompting the average investor to settle for assets that embed higher risks".
The report advised governments to minimise the impact by easing in new regulations that require banks to hold larger volumes of safe assets: "Although regulatory reforms to make institutions safer are clearly needed, insufficient differentiation across eligible assets to satisfy some regulatory requirements could precipitate unintended cliff effects – sudden drops in the prices – when some safe assets become unsafe and no longer satisfy various regulatory criteria."
The Telegraph
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