The toxic cocktail that could blow up markets

The global bond rout that has roiled financial markets provides a sharp and threatening edge to the layers of pre-existing risks within the markets.

Last weekend’s letter by Bank of England governor, Andrew Bailey, to the G20 finance ministers and central bankers attending the summit in North Carolina detailed some of those threats to the global economy and financial system, with special mentions for AI-related security and market risks.

Bailey said that markets, while absorbing the supply shock of the war in the Middle East and the energy-driven inflation it has generated, remain vulnerable to a “potentially disorderly” correction that could spread across borders.

He referred to the “fragilities” in sovereign debt markets, the increased use of leverage by market participants, vulnerabilities in private credit and the interconnectedness of private credit with other parts of the financial system and “stretched” asset valuations, particularly for artificial intelligence-related investments.

The starting point for any assessment of the levels of risk in the financial system is the amount of leverage within the system. It’s awash with debt and leverage .

Government debt in the post-pandemic era is at record and arguably unsustainable levels, with government debt alone nearly 100 per cent of global GDP.