The coronavirus (COVID-19) pandemic is presenting a historic economic challenge, according to the Global Financial Stability (GFS) report, released by the International Monetary Fund (IMF) on Tuesday.
In mid-February, when markets began fearing the outbreak would become a global pandemic, the prices of equities fell sharply, from previously overstretched levels, the report said.
The report added that on credit markets, spreads skyrocketed, especially in risky segments such as high-yield bonds, leveraged loans, and private debt, where issuance essentially came to a halt.
Oil prices plummeted in the face of weakening global demand and the failure of the OPEC+ countries to reach an agreement on output cuts. This has added a further pulling back in risk appetite, the report noted.
These volatile market conditions led to yields on safe-haven bonds declining abruptly, the report said. It added that a number of factors amplified asset price moves, contributing to a sharp tightening of financial conditions at unprecedented speed.
Signs of strain emerged in major short-term funding markets, including the global market for US dollars. This development is reminiscent of the dynamics last seen during the financial crisis of 2008.
Market liquidity deteriorated considerably, including in markets traditionally seen as very deep. Leveraged investors came under pressure, with some reportedly forced to close out some of their positions in order to meet margin calls and rebalance their portfolios.