CNBC
BANGKOK – The International Monetary Fund (IMF) issued a warning on Tuesday that government bond yields could experience a disorderly increase due to escalating inflation, rising debt levels, and heightened borrowing pressures from artificial intelligence (AI) ventures impacting sovereign bond markets.
In several advanced economies, government bond yields have surged to their highest levels in decades. This trend has been fueled by rising energy costs stemming from the ongoing conflict in the Middle East and anticipations of tighter monetary policies as central banks strive to combat the resurgence of inflation.
In its latest Global Financial Stability Report, the IMF highlighted concerns regarding the potential deterioration of sovereign bond risks, specifically noting the possibility of "a sharp rise in sovereign bond yields." This report was released as part of the ongoing IMF-World Bank annual meetings in Bangkok, Thailand, which has gathered over 18,000 delegates to discuss global economic conditions and the financial landscape.
Key Risks
The report emphasized that elevated debt levels and refinancing risks render the bond market "susceptible to more frequent fiscal and inflation shocks." The IMF had previously stated that global public debt has nearly reached its highest levels since World War II, with projections indicating it could soon surpass 100% of GDP.
Given the critical role of sovereign bond markets, the IMF commented, "Impact could be severe" in the event of a rapid rise in yields. Such an increase would lead to a decline in asset values due to higher discount rates, adversely affecting AI-related assets and diminishing the value of government bonds used as collateral.
AI Borrowing Adds Strain
The IMF pointed out that the significant surge in borrowing by AI companies, which are competing with sovereign bonds for investor interest, represents an added strain on bond markets. The proportion of global investment-grade bond issuance attributed to hyperscalers has surged from less than 1% to 10% since 2024, according to the report.
The ongoing global buildout in AI has prompted major technology companies—such as Alphabet Inc's Google and Meta Platforms, as well as hyperscalers and AI laboratories—to accumulate hundreds of billions of dollars in debt this year alone.
Marc Seidner, Chief Investment Officer of non-traditional strategies at Pacific Investment Management, remarked, "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 Fund Leverage Concerns
The report noted that while hedge funds have partially unwound their leveraged Treasury basis trades without significant pressure in repurchase markets, the remaining leverage in the system leaves the market "susceptible to a disorderly unwind."
As highlighted by the IMF, hedge funds' share of U.S. Treasuries increased to approximately 9% in 2025, up from about 4% in 2022, mainly through highly arbitraged strategies, based on Federal Reserve data.
Liquidity Concerns
Positively, the IMF indicated that liquidity measures have remained stable across the U.S., Europe, and the U.K., noting that market functioning "has been orderly." Japan, however, stands out as an outlier, where liquidity has "continued to deteriorate" in its government bond market amid rising yield volatility following the end of yield curve control.
Policy Recommendations
The IMF recommended that debt managers focus on extending the maturities of their debt, alerting that rollover risks could be worsened by strategies that involve substituting long-term debt with short-term borrowing on a large scale.
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