The International Monetary Fund has warned that government bond yields could rise sharply and disorderly, as inflation, mounting debt and AI-related borrowing pressure sovereign markets.
Government bond yields in several advanced economies have already climbed to multidecade highs, driven by higher energy costs linked to the Middle East conflict and expectations of tighter monetary policy.
In its latest Global Financial Stability Report, the IMF cautioned that sovereign bond risk is deteriorating, warning explicitly of “a sharp rise in sovereign bond yields” as a credible near-term threat.
The report was released as part of the IMF-World Bank annual meetings in Bangkok, Thailand, where more than 18,000 delegates gathered to discuss the state of the global economy and financial system.
High debt loads and rollover risks leave bond markets “susceptible to more frequent fiscal and inflation shocks,” the IMF said, building on last week’s warning that global public debt is approaching its highest level since World War II.
The fund added that global public debt is on track to soon exceed 100% of GDP, a threshold that would mark a historic and deeply troubling milestone for the international financial system.
“Impact could be severe given the foundational importance of sovereign bond markets,” the IMF said, noting that a sharp yield rise would mark down asset values through higher discount rates, including for AI-related assets.
The IMF also flagged the rapidly rising borrowing by AI firms as an additional source of strain, with hyperscalers’ share of global investment-grade bond issuance rising to 10% from less than 1% since 2024.
“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,” according to Marc Seidner, CIO of non-traditional strategies at Pacific Investment Management.
Hedge funds’ growing holdings of US Treasuries are adding further concern, with their share of the market rising to about 9% in 2025 from about 4% in 2022, mostly through highly arbitraged strategies, the IMF said, citing Federal Reserve data.
Caio Ferreira, IMF deputy division chief for financial supervision and regulation, said the worry stems from hedge funds’ rising leverage and their increasingly overlapping positions, meaning multiple funds hold identical trades that could amplify any collective unwinding.
The IMF also sounded the alarm over a web of “circular” financing deals among AI firms, with 14 publicly disclosed deals since 2023 channelling around $300 billion of equity into financially weaker AI firms, alongside $650 billion of debt.
In exchange for that financing, investors secured $1.4 trillion of “future revenue commitments” through services or chip orders, a structure the IMF described as unusual and potentially dangerous.
Jason Wu, assistant director of the IMF monetary and capital markets department, said at a press briefing: “What makes this a little bit unusual compared to previous deals is the future revenue commitments, hence the circularity.”
Wu warned of what he described as a “triple whammy” if AI commercialisation falls short: “If there are questions about the monetization in AI, the equity investments will deplete in value, the debt may be difficult to service, and the revenue commitments in the future may not materialize.”
He added that concentration among a handful of firms amplifies the danger: “If there are some kind of issues with those entities, then the circularity would pose risk to the market.”
On a more positive note, the IMF said liquidity has held up in the US, Europe and the UK, though Japan’s government bond market remains an exception as liquidity “continued to deteriorate” following the end of yield curve control.
The fund urged debt managers globally to lengthen maturities, warning that replacing long-term debt with short-term borrowing on a large scale could significantly exacerbate rollover risk across sovereign markets.