The International Monetary Fund warned Tuesday that bond yields face risk of disorderly spikes as multiple pressures converge on sovereign debt markets. The warning came in the fund's Global Financial Stability Report, released during the IMF-World Bank annual meetings in Bangkok.
Rising inflation expectations, mounting government debt, and surging borrowing by artificial intelligence firms are straining bond markets, the IMF said. Government bond yields in advanced economies have already climbed to multidecade highs, driven partly by higher energy costs from Middle East conflict and expectations that central banks will maintain tight monetary conditions to combat inflation.
The IMF noted that global public debt has reached near its highest level since World War II and is on track to exceed 100% of global GDP. High existing debt loads make bond markets "susceptible to more frequent fiscal and inflation shocks," the report stated. The fund warned that a sharp rise in yields would mark down asset values through higher discount rates and erode the value of bonds used as collateral.
Hyperscalers and AI labs have emerged as a new source of pressure. Their share of global investment-grade bond issuance rose to 10% from less than 1% since 2024, the IMF said. 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 Company, acknowledged that "AI-linked issuance has grown large enough to compete with government bonds for investor capital."
The fund also flagged structural vulnerabilities. Hedge funds now hold roughly 9% of U.S. Treasuries as of 2025, up from 4% in 2022, mostly through highly leveraged arbitrage strategies. Caio Ferreira, IMF deputy division chief for financial supervision and regulation, said the concern stems from hedge funds' rising leverage and overlapping positions, which could amplify impact if many funds unwind trades simultaneously.
A web of financing arrangements within the AI sector compounds risk. Since 2023, 14 publicly disclosed deals channeled about $300 billion of equity and $650 billion of debt into financially weaker AI firms. In return, investors secured $1.4 trillion of future revenue commitments through services or chip orders. Jason Wu, IMF assistant director of monetary and capital markets, described this structure as creating a "triple whammy" risk: if AI commercialization disappoints, equity investments would lose value, debt becomes harder to service, and future revenue commitments may not materialize. Such heavy concentration in a handful of firms heightens systemic concern.
On the positive side, liquidity has held up in the U.S., Europe and the U.K. Japan is an exception, with bond market liquidity continuing to deteriorate.