IMF warns bond yields could see ‘disorderly’ rise as debt and inflation risks deepen

BANGKOK – The International Monetary Fund warned on Tuesday that government bond yields could rise disorderly, as rising inflation, rising debt and AI-linked borrowing put pressure on sovereign bond markets.

Yields on government bonds in several advanced economies have risen to multi-decade highs, driven by rising energy costs due to the Middle East conflict and expectations of tighter monetary conditions as central banks seek to curb resurgent inflation.

In its latest global financial stability report, the fund warned that sovereign bond risk could deteriorate, warning of “a sharp rise in sovereign bond yields.” The report was released Tuesday as part of the annual meetings of the IMF and World Bank in Bangkok, Thailand, this week, where more than 18,000 delegates gathered to discuss the state of the global economy and financial system.

High debt levels and rollover risks make the bond market “vulnerable to more frequent fiscal and inflationary shocks,” the report said. The IMF warned last week that global public debt had reached its highest level since World War II and was on track to soon exceed 100% of GDP.

“The impact could be severe given the fundamental importance of sovereign bond markets,” the IMF said on Tuesday. A sharp rise in yields would depreciate asset values ​​due to higher discount rates, including for AI-related assets, and erode the value of government bonds posted as collateral.

The IMF also highlighted the exponential increase in borrowing by AI companies – which compete with sovereign bonds to meet investor demand – as an additional source of tension in bond markets. Hyperscalers’ share of global investment-grade bond issuance has increased from less than 1% to 10% since 2024, the report said.

The global development of AI has seen tech giants, such as Alphabet Inc. Google, Metaplatformshyperscalers and AI labs are raising hundreds of billions of dollars in debt this year.

“AI-related issues – mostly longer-term – have become large enough to rival government bonds for investment capital, although they do not appear to be the dominant driver of returns,” according to Marc Seidner, CIO of non-traditional strategies at Pacific Investment Management.

Hedge funds’ growing holdings of Treasuries leave the market “vulnerable to a disorderly outcome,” the IMF said. Leveraged transactions have partly unwound without significant pressure on the short-term lending market, but the remaining leverage is a concern.

Hedge funds’ share of U.S. Treasuries rose from about 4% in 2022 to about 9% in 2025, mainly driven by heavily arbitraged strategies, the IMF said, citing Federal Reserve data.

Caio Ferreira, deputy head of the IMF’s financial supervision and regulation division, said the concern stems from the growing leverage of hedge funds and their increasingly overlapping positions, meaning multiple funds hold the same trades, potentially amplifying the impact of a collective unwinding.

On the positive side, liquidity held up in the United States, Europe and the United Kingdom, the IMF said. Japan is an exception: the liquidity of its government bond market has “continued to deteriorate” while yield volatility has increased since the end of yield curve control.

The fund urged debt managers to extend maturities, warning that refinancing risk could be exacerbated by strategies that replace long-term debt with large-scale short-term borrowing.

The IMF has sounded the alarm over a network of “circular” financing agreements between AI companies.

Since 2023, 14 publicized deals have funneled approximately $300 billion in equity capital, led by hyperscalers, into financially weaker AI companies, as well as $650 billion in debt. In exchange, investors got $1.4 trillion in “future revenue commitments” via orders for services or chips, the IMF said.

The revenue promises are what set the deals apart, Jason Wu, deputy director of the IMF’s Monetary and Capital Markets Department, said at a press briefing Tuesday. “What makes this a bit unusual compared to previous deals are the future revenue commitments, hence the circularity.”

If commercialization of AI fails, losses could pile up. “If there are questions about monetizing AI, equity investments will lose value, debt may be difficult to insure, and revenue commitments in the future may not materialize,” Wu said, describing what he called a “triple whammy.”

Such funding and revenue promises are concentrated in a handful of AI companies, according to the report. Because of this concentration, “certain companies and certain nodes are particularly exposed,” Wu said. “If there are problems with these entities, then circularity would present a risk to the market.”