The International Monetary Fund warned Tuesday that government bond yields face risk of disorderly spikes as inflation, sovereign debt and AI-sector borrowing strain markets globally.
Bond yields in advanced economies have climbed to multidecade highs, driven by higher energy costs tied to Middle East conflict and expectations for tighter monetary policy as central banks combat resurgent inflation. The IMF's Global Financial Stability Report, released at the IMF-World Bank annual meetings in Bangkok, flagged deteriorating sovereign bond risk and the potential for "a sharp rise in sovereign bond yields."
High global debt loads amplify vulnerability. The IMF reported last week that global public debt had reached near its highest level since World War II and was on track to soon exceed 100% of GDP. This leaves bond markets "susceptible to more frequent fiscal and inflation shocks," the report said. A sharp yield rise would mark down asset values through higher discount rates, including AI-related assets, and erode the value of government bonds held as collateral.
The IMF highlighted a novel pressure: AI firms and hyperscalers competing with sovereign bonds for investor capital. Hyperscalers' share of global investment-grade bond issuance rose to 10% from less than 1% since 2024, the report stated. Tech giants including Google and Meta have raised hundreds of billions in debt this year. Marc Seidner, CIO of non-traditional strategies at Pacific Investment Management, noted that "AI-linked issuance, much of it longer-dated, has grown large enough to compete with government bonds for investor capital, even if it does not appear to be the dominant driver of yields."
Hedge funds also pose risk. Their share of U.S. Treasuries rose to about 9% in 2025 from about 4% in 2022, mostly through highly arbitraged strategies. Caio Ferreira, IMF deputy division chief for financial supervision and regulation, said the worry stems from hedge funds' rising leverage and overlapping positions. A collective unwinding could amplify market impact. The IMF warned leveraged basis trades leave Treasuries "susceptible to a disorderly unwind."
The IMF flagged unusual "circular" financing among AI firms. Since 2023, 14 publicly disclosed deals channeled about $300 billion of equity and $650 billion of debt into financially weaker AI firms, with investors securing $1.4 trillion in "future revenue commitments" through services or chip orders. Jason Wu, assistant director of the IMF monetary and capital markets department, described potential losses as a "triple whammy" if AI commercialization falters: equity investments depleting in value, debt becoming difficult to service, and future revenue commitments failing to materialize.