The International Monetary Fund warned on Tuesday that government bond yields could rise in a disorderly fashion, as rising inflation, mounting debt and AI-related borrowings pressure sovereign bond markets, CNBC reported. The warning came in the fund's latest Global Financial Stability Report, released at the IMF-World Bank annual meetings in Bangkok, where more than 18,000 delegates gathered.
Government bond yields in several advanced economies have climbed to multidecade highs, driven by higher energy costs from the Middle East conflict and expectations for tighter monetary conditions. The IMF warned last week that global public debt had reached near its highest level since World War II and was on track to soon exceed 100 per cent of GDP. High debt load and rollover risks make the bond market susceptible to more frequent fiscal and inflation shocks, the report said.
A sharp rise in yields would mark down asset values through higher discount rates, including for AI-related assets, and erode the value of government bonds posted as collateral, the IMF said. Hyperscalers' share of global investment-grade bond issuance has risen to 10 per cent from less than 1 per cent since 2024, the report said. Tech giants such as Alphabet's Google and Meta Platforms have raised hundreds of billions of dollars in debt this year as part of the global AI buildout.
Hedge funds' share of US Treasuries rose to about 9 per cent in 2025 from about 4 per cent in 2022, mostly through highly arbitraged strategies, the IMF said, citing Federal Reserve data. The fund warned that hedge funds' growing holdings leave the market susceptible to a disorderly unwind. 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, potentially amplifying impact from a collective unwinding.
The IMF also sounded the alarm over a web of circular financing deals among AI firms. Since 2023, 14 publicly disclosed deals channelled about 300 billion dollars of equity, led by hyperscalers, into financially weaker AI firms, alongside 650 billion dollars of debt. In exchange, the investors secured 1.4 trillion dollars of future revenue commitments through services or chip orders, the IMF said. Jason Wu, assistant director of the IMF monetary and capital markets department, said at a press briefing on Tuesday that if AI commercialisation falls short, the equity investments will deplete in value, the debt may be difficult to service, and the revenue commitments may not materialise.
On the bright side, liquidity has held up in the US, Europe and the UK, the IMF said. Japan is the exception: liquidity in its government bond market has continued to deteriorate as yield volatility has risen since the end of yield curve control. The fund urged debt managers to lengthen maturities, warning that rollover risk could be exacerbated by strategies that replace long-term debt with short-term borrowing on a large scale.
Why it matters for wealth
A disorderly spike in sovereign yields would hit fixed-income portfolios directly and raise refinancing costs for leveraged wealth structures. The concentration of AI financing risk and hedge fund leverage add fragility to markets that underpin collateral values and liquidity assumptions.
What to watch
Monitor sovereign yield curves and hedge fund positioning data for signs of stress, particularly in short-term funding markets.
Source: CNBC
Photo: Rafael Minguet Delgado / Pexels
