Global bond markets are facing a dangerous combination of rising inflation, record debt levels, and surging AI-related borrowing, the International Monetary Fund warned Tuesday.
The IMF released its latest Global Financial Stability Report as part of the annual IMF-World Bank meetings in Bangkok, Thailand, where more than 18,000 delegates gathered this week.
Government bond yields in several advanced economies have already climbed to multidecade highs, driven by higher energy costs tied to the Middle East conflict and expectations for tighter monetary policy.
Central banks are under pressure to curb resurgent inflation, reinforcing fears that sovereign bond markets could face further stress in the months ahead.
The IMF warned that high debt loads and rollover risks leave the bond market “susceptible to more frequent fiscal and inflation shocks,” with a sharp rise in sovereign yields possible.
The fund had 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% of GDP.
“Impact could be severe given the foundational importance of sovereign bond markets,” the IMF said, noting that a yield spike would mark down asset values through higher discount rates and erode the value of government bonds posted as collateral.
Adding pressure to an already strained system, borrowing by AI firms has risen sharply, with hyperscalers’ share of global investment-grade bond issuance climbing to 10% from less than 1% since 2024.
Tech giants including Alphabet Inc’s (GOOGL) Google and Meta Platforms (META) have raised hundreds of billions of dollars in debt this year to fund the global AI buildout.
Marc Seidner, CIO of non-traditional strategies at Pacific Investment Management, noted that “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 funds represent another major source of concern, as their share of U.S. Treasuries rose to about 9% in 2025 from roughly 4% in 2022, according to IMF data citing the Federal Reserve.
The IMF warned that leveraged positions held by hedge funds leave Treasuries “susceptible to a disorderly unwind,” with overlapping trades across multiple funds potentially amplifying any collective unwinding.
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 across the market.
On a more positive note, the IMF said liquidity has held up in the U.S., Europe, and the U.K., though Japan’s government bond market remains a notable exception as yield volatility has risen since the end of yield curve control.
The IMF also raised alarms over what it described as “circular” financing arrangements among AI firms, involving 14 publicly disclosed deals since 2023 that channeled roughly $300 billion of equity and $650 billion of debt into financially weaker AI companies.
In exchange for those investments, the investors secured $1.4 trillion of “future revenue commitments” through services or chip orders, a structure the IMF flagged as highly unusual and potentially dangerous.
Jason Wu, assistant director of the IMF monetary and capital markets department, explained the core risk plainly: “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.”
Wu described that scenario as a “triple whammy,” warning that because financing and revenue promises are concentrated in just a handful of AI firms, problems at key nodes could send shockwaves across the broader market.
“If there are some kind of issues with those entities, then the circularity would pose risk to the market,” Wu said, highlighting the systemic danger embedded in the current AI financing structure.
The IMF urged debt managers globally to lengthen maturities, cautioning that replacing long-term debt with short-term borrowing at scale could sharply exacerbate rollover risk during periods of market stress.
