This presentation provides an updated overview of the state of global financial markets with a focus on the developments following the COVID-19 crisis and an assessment of market dynamics and downside risks. Find out more at www.oecd.org/finance

1. GLOBAL FINANCIAL MARKETS
Inflation, indebtedness, and risk complacency
Are markets prepared for rate normalisation?
Committee on Financial Markets, 22 October 2021
OECD Directorate for Financial and Enterprise Affairs

2. Committee on Financial Markets
• The Committee on Financial Markets’ overarching objective is to promote efficient,
open, stable and sound financial systems, based on high levels of transparency,
confidence, and integrity, so as to contribute to sustainable and inclusive growth.
• The Committee’s core method to support this objective is through in-depth and
proactive surveillance of financial developments and analysis of their impact on
economic growth and stability.
• This presentation reflects the Committee’s current surveillance of global financial
markets and risk transmission mechanisms related to the economic and financial
consequences of Covid-19.
2

3. 3
Overview
Key financial market developments
Assessment of market dynamics and risks
Alternative finance markets and risk
implications
1
2
3

4. 1. KEY RECENT FINANCIAL MARKET
DEVELOPMENTS
4

5. Rising commodity prices and inflationary pressures amid a sustained
economic recovery contributed to a repricing of sovereign bonds
• A sustained economic recovery has prompted
a rapid increase in demand, with tensions
along supply chains, resulting in substantial
increases in key commodity prices and
shipping costs.
5
• Inflationary pressures have increased
expectations that ultra-accommodative
monetary policies will tighten, which have
contributed to a repricing of sovereign bonds
and a substantial rise in yields in major
markets.
Surging energy and commodity prices
throughout the COVID-19 crisis recovery
Rising long-term sovereign bond yields of
selected advanced markets
Source: Refinitiv.
Source: Refinitiv.
100
150
200
250
300
350
400
450
500
100
150
200
250
300
350
Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21
Price index (100=April 2020)
Price index (100=April 2020)
Aluminium Copper Zinc
Agricultural commodities Marin freight and logistic costs (RHS) Crude oil (RHS)
-1
-0.5
0
0.5
1
1.5
2
2.5
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21
%
United States United Kingdom Euro Area Japan Australia Canada

6. Elevated equity prices and narrow credit spreads leading to
stretched valuations in segments of financial markets
• Elevated equity valuations in some countries may
be subject to corrections in a higher interest rate
environment should rising inflation and rates
weaken the outlook for growth and corporate
profitability.
6
• Credit market conditions for lower-rated
corporate issuers have started to moderately
deteriorate since mid-2021, yet spreads
remain tighter than prior to the COVID-19
crisis.
Elevated equity valuations in some markets Moderately increasing speculative-grade
corporate bond spreads
Note: 12-month forward price-to-earnings ratio calculated using I/B/E/S 12-month forward
earnings-per-share estimates for the underlying index constituents
Source: Refinitiv.
Note: Option-adjusted spreads are derived from ICE BofAML bond indices
Source: Refinitiv, OECD calculations.
8
10
12
14
16
18
20
22
24
Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
Forward P/E (%)
China United States Euro Area United Kingdom Japan Emerging markets
0
200
400
600
800
1000
1200
1400
1600
1800
2000
100
400
700
1000
1300
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21
Basis points
Basis points
US BB US B Euro High-Yield EMEs corporate High-Yield US CCC (RHS)

7. Higher inflation outlook prompts rate increases, led by EMEs
• Investors already expect medium-term inflation
to increase in major advanced markets, notably
at levels close to the 2% inflation threshold over
the long-run in the United States and the Euro
Area.
7
• Major central banks have communicated on
their incremental approaches to tighten
monetary conditions and several central
banks mainly in EMEs, and to a lesser extent
in some advanced economies, have already
raised their policy rates to address higher
inflation.
Rising 5-year inflation expectations in selected
advanced markets
Increase in central bank policy rates in certain
advanced and EMEs in 2021
Note: The figure shows the 5-year breakeven inflation rate in the United States and 5-year
inflation linked swap rates in the Euro Area and the United Kingdom.
Source: Refinitiv.
Note: Advanced economies are in italics consistently with the IMF classification.
Source: BIS Policy Rate database.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
%
United States Euro Area United Kingdom
Q1 2021 Q2 2021 September 2021
Australia 0.1 0.1 0.1
Euro area 0 0 0
Japan -0.1 -0.1 -0.1
United Kingdom 0.1 0.1 0.1
United States 0.125 0.125 0.125
Brazil 2.75 4.25 6.25
Russia 4.5 5.5 6.75
Hungary 0.6 0.9 1.65
Chile 0.5 0.5 1.5
Peru 0.25 0.25 1
Czech Republic 0.25 0.5 0.75
Iceland 0.75 1 1.25
Korea 0.5 0.5 0.75
Mexico 4 4.25 4.5
Norway 0 0 0.25

8. Surging energy prices likely to spur persisting inflation that could
contribute to an abrupt tightening of monetary policy
• Fossil fuel supply shortages could aggravate
bottlenecks, without sufficient supply of
renewable energy creating substantial upward
pressure on energy prices and inflation.
8
• Lower investment in extraction due to
decarbonisation and investments in
renewable energy production, which may
also be contributing to higher energy prices.
Falling number of active rigs in North America Declining capital expenditures of large energy
companies globally
Source: Baker Hughes. Note: The figure shows capital expenditures for a global sample of 85 energy companies listed
in the Refinitiv World energy equity benchmark.
Source: Refinitiv.
0
200
400
600
800
1000
1200
1400
1600
1800
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
Oil Gas
0
2
4
6
8
10
12
14
0
50
100
150
200
250
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
%
USD, bn
Capital expenditure As a share of net sales (RHS) As a share of total assets (RHS)

9. 2. ASSESSMENT OF MARKET
DYNAMICS AND RISK IMPLICATIONS
9

10. Robust conditions for corporate bond issuance despite shortened
debt-maturities that contribute to increase refinancing risk
• Unprecedented monetary and fiscal policy
measures continue to support strong investors’
appetite for risk assets that contributes to much
faster debt accumulation than equity.
10
• Shortened debt-maturities of lower-rated
issuers contribute to increase their refinancing
risk in a rising rate environment and weaken
their ability to survive temporary external
shocks that are threatening the financial
viability of an otherwise viable firms.
Intensive issuance of non-financial corporate
bonds in 2021
Shortened debt-maturity profile of non-
investment grade corporate issuers
Source: ICMA DCM outstanding and volumes of new issues from Dealogic, Refinitiv, OECD
calculations.
Note: Maturity is the average of the original maturity equally weighted proceeds.
Source: OECD Capital Market Series dataset, OECD calculations.
0
100
200
300
400
500
600
Global IPOs Global SPAC
IPOs
US Private equity European Private
equity
USD speculative-
rated corporate
bonds
US leveraged
loans
EUR speculative-
rated corporate
bonds
European
leveraged loans
USD, bn
2020 First semester 2021
8.7
8.1
6.4
12.3
7.1
5.1
0
2
4
6
8
10
12
14
All investment grade All non-investment grade Unrated
Number of years
2000-2004 average 2015-2019 average

11. Elevated corporate indebtedness and eroding earnings raise concerns
of credit quality deterioration as rates begin to normalise
• Credit market conditions for lower-rated issuers
remain accommodative despite rising leverage
and defaults, which raise concerns about
corporate debt sustainability.
11
• Loss making firms may record declining
earnings due to cost inflation, that combined
with elevated leverage, may threaten their
debt sustainability and trigger rating
downgrades and defaults.
Increase in net-debt-to-EBITDA ratios since 2019
in most advanced and EMEs
The rising share of loss making firms
Note: Net debt is defined as total debt minus cash.
Source: Refinitiv, OECD calculations.
Note: The figure shows the number of firms with negative EBITDA over the period 2004-
2021. Calculations include firms listed in the Refinitiv global market equity benchmark.
Source: Refinitiv, OECD calculations.
0
1
2
3
4
5
6
7
8
9
10
2004 2006 2008 2010 2012 2014 2016 2018 2020
% of total number of non-
financial firms
Advanced Emerging
0
1
2
3
4
5
6
7
United Kingdom Australia Euro Area Canada EMEs United States
Net-debt-to-EBITDA ratio
2019 2020 2021

12. Loosening bank credit standards may further raise concerns about
corporate debt sustainability
• US and to a lesser extent European banks have
eased their credit standards in 2021 amid
increased competition for loans.
12
• If this loosening were to continue, leveraged
borrowers may face substantial refinancing
risk in a rising rate and slower growth
environment, which could erode banks’ asset
quality.
Loosening corporate lending standards of US
banks
Moderately loosening corporate lending
standards of European banks
Source: Refinitiv, OECD calculations. Source: Refinitiv, OECD calculations.
-80
-60
-40
-20
0
20
40
60
80
100
Q1 2003 Q4 2006 Q3 2010 Q2 2014 Q1 2018 Q4 2021
%
Net percentage of banks tightening standards for loans to firms
Net percentage of US banks reporting stronger demand for loans to firms
-60
-40
-20
0
20
40
60
80
Q1 2003 Q4 2006 Q3 2010 Q2 2014 Q1 2018 Q4 2021
%
Net percentage of European banks tightening standards for loans to firms
Net percentage of European banks reporting stronger demand for loans to firms

13. Strained conditions in some real estate sectors may trigger spillovers to
leveraged financial intermediaries and corporates
• Elevated default rates in certain commercial real
estate sectors would make CMBS markets prone
to spillovers while rising interest rates would
make MBSs prone to price corrections that
could trigger spillovers to leveraged trusts and
funds that perform liquidity transformation.
13
• Financial distress of China’s largest property
developer in September 2021 has contributed
to deteriorate Asian funding market
conditions, that raises refinancing risk and
debt sustainability concerns for leveraged
Asian corporates.
Elevated delinquency rates in certain commercial
real estate sectors
Spillovers of Evergrande’s financial distress
mainly seen in Asian markets and to a lesser
extent to EMEs
Source: Refinitiv, OECD calculations. Source: Refinitiv, OECD calculations.
0
5
10
15
20
25
30
December
2018
March 2020 May 2020 July 2020 September
2020
November
2020
January
2021
March 2021 May 2021 July 2021 September
2021
%
Industrial Lodging Multifamily Office Retail
70
80
90
100
110
120
130
140
150
160
170
300
800
1300
1800
2300
2800
Aug-14 Apr-15 Dec-15 Aug-16 Apr-17 Dec-17 Aug-18 Apr-19 Dec-19 Aug-20 Apr-21
Price index (100=Aug-2014)
Basis points
Asian Dollar high-yield corporate, China index Asian Dollar high-yield corporate, overall index
EM high-yield corporate Hang Seng property and construction index (RHS)

14. Sustained high sovereign debt and gross financing needs will
expose EMEs to refinancing risk in a rising rate environment
• 35% of current outstanding sovereign debt will
be due over the next three years and the credit
quality of many sovereigns has deteriorated
following waves of rating downgrades in 2020.
14
• Rising investors’ concerns about weak credit
fundamentals combined with large financing
requirements are reflected by moderately
rising credit spreads since September 2021.
Redemptions of central government marketable
debt will be required in the coming years for many
OECD and EME economies
Rising CDS spreads in selected major EMEs
Note: The figure shows redemptions of central government marketable debt in OECD
economies versus selected emerging OECD economies calculated on current USD amounts
outstanding using the debt comparable application data.
Source: Refinitiv, OECD calculations.
Source: Refinitiv.
25
15
11
10
9
10
0
5
10
15
20
25
30
35
40
45
50
OECD Emerging OECD
%
2021 2022 2023
20
85
150
215
280
345
410
Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21
Basis points
Brazil Russia South Africa Mexico Turkey Poland Hungary

15. Deteriorating sovereign budgetary conditions may contribute to
weakening the recovery, causing an erosion of bank asset quality
• Should interest rates rise, increasing refinancing
needs will be met with higher costs, which will
raise concerns on already elevated debt
servicing levels, and possibly erode debt
sustainability.
15
• Given more prevalent bank-based financing
in EMEs, a prolonged severe disruption could
boost bank NPLs that may impair bank
balance sheets, depress credit growth, and
delay economic recovery.
Average share of interest expenses in total
sovereign debt repayment in EMEs
Deteriorating profitability and asset quality of
banks in EMEs
Note: This figure shows the share of interest payment on sovereign debt as a share of total
repayment expense.
Source: World Bank, OECD calculations.
Note: This figure shows average ratios for a sample of 160 banks in EMEs.
Source: Refinitiv, OECD calculations.
0
2
4
6
8
10
12
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
% of expense
Low and middle-income countries High-income countries
0
5
10
15
20
25
Total risk-weighted capital ratio Return on equity Non-performing loan ratio
% of total loans
2007 2019 2020

16. 3. THE RISING IMPORTANCE OF
ALTERNATIVE FINANCE MARKETS
AND RISK IMPLICATIONS
16

17. Crypto-assets do not appear to portray the properties of inflation or
market hedging tools
• The rapid growth of the crypto-asset markets
has been attributed to a search for yield and
inflation hedging, by some market participants.
17
• Positive correlation of returns on crypto-assets
with equity benchmarks and to a lesser extent
with inflation expectations, while no significant
correlation with gold, suggests crypto-assets
are not used for inflation hedging but rather as
high yielding investments.
Market capitalisation of crypto-assets, S&P
performance and US inflation expectations
Correlation between annual returns of selected crypto-
assets, financial asset and inflation expectations
Source: Refinitiv, OECD calculations. Source: Refinitiv, OECD calculations.
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
0
300
600
900
1200
1500
1800
2100
2400
2700
Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21
% or price index (1=Dec-
2016)
USD, bn
Bitcoin Ethereum
Other cryptocurrencies US 5-year breakeven inflation rate (RHS)
S&P 500 price index (RHS)

18. Increasing sustainable-labelled sovereign issuance could help set
benchmarks to support the expansion of private sector markets
• Lack of consistency of sustainability-labelled
products and limited resources at public debt
management offices, particularly in EMEs,
could limit their ability to mitigate mispricing
and sustainability risks.
18
• Leveraged corporates operating in sectors
exposed to climate risks may experience
rising costs, that combined with increasing
energy prices, could erode earnings, increase
rating downgrades, borrowing costs and
refinancing risk.
Rising sovereign sustainable debt issuance Distribution of credit scores between 2019
and 2022 after carbon taxes
Source: Refinitiv, OECD calculations. Note: Source: ECB calculations based on Four Twenty Seven
and Urgentem data (2018). Source: ECB.
0 100 200 300 400 500 600
H1 2017
H1 2018
H1 2019
H1 2020
H1 2021
USD, bn
Corporate Agency/Sovereign

19. Bouyant global market conditions continue; yet vulnerabilities could
be exacerbated amid rising inflation risks
19
• Despite narrow speculative-grade corporate bond spreads, rising leverage
and elevated defaults raise concerns about corporate debt sustainability.
• Loosening bank credit standards could cause banks to become more
exposed to weaker corporate and commercial real estate credits.
• Persistent and elevated default rates in certain commercial real estate
sectors combined with rising interest rates would make MBSs prone to
price corrections which could bring spillovers to leveraged financial
intermediaries.
• The vulnerability of EMEs to elevated debt levels combined with
deteriorating public and private sector credit quality will expose them to
higher refinancing risk in a rising rate environment.
• High and rising crypto-asset prices fueled by investors’ search for yield, and
the uncertainty over the extent to which rising rates could cause an
unwinding of positions and collateral liquidations, including in DeFi.
Corporate debt
sustainability
concerns
Risk of higher
losses for banks
on corporate loans
Elevated crypto-
asset valuations
EME risks are
rising
Risk of
corrections and
spillovers in real
estate finance

20. .
Supporting financial markets in the post-COVID-19
environment
Financial markets policy guidance on the OECD Financial markets webpage:
 Financial Markets & Intermediation: surveillance and analysis of markets and
intermediation to assess frameworks and policies effectively contributing to economic growth
 FinTech & Digitalisation of Finance: how the adoption of innovative technologies in
finance can contribute to economic growth
 Sustainable Finance: essential to the long-term value that underpins inclusive growth
 Public debt management: increased borrowing needs and market volatility
Link to Recent OECD publications:
 OECD Economic Outlook, Interim Report September 2021
 Resolution strategies for bank NPLs in the post-COVID-19 landscape
 Regulatory Approaches to the Tokenisation of Assets
 Financial Markets and Climate Transition: Opportunities, Challenges and Policy Implications
 ESG Investing and Climate Transition: Market Practices, Issues and Policy Considerations