“Government Tightening” bond yields Banks may suffer mark-to-market losses due to additional borrowings,” the central bank said in its financial stability report.
In such a scenario, if banks lose their appetite to hold sovereign loans, it could trigger a negative reaction.
“This could potentially reduce their lending and adversely affect overall economic activity, especially in countries with high financial vulnerability and under-capitalized banking systems,” the report said.
With the sovereign credit outlook deteriorating in many emerging markets, the relationship between sovereign debt holdings and bank balance sheets poses risks to macro-financial stability.
During the three-month period, the benchmark bond yield rose 76 basis points to a high of 7.60% on June 13. One basis point is 0.01%.
When yields rise, prices fall. The benchmark bond yield stood at 7.45% on Thursday.
The report cited the IMF’s recommended policy response to mitigate risk. These include preserving bank capital resources to absorb losses and conducting bank stress tests.