The International Monetary Fund (IMF) issued a warning on Tuesday regarding the possibility of a disorderly rise in government bond yields. This concern follows increasing inflation, escalating debt levels, and growing borrowings related to artificial intelligence (AI), which are placing pressure on sovereign bond markets. Yields on government bonds in several advanced economies have reached their highest levels in decades, influenced by higher energy prices due to ongoing conflicts in the Middle East and expectations of tightened monetary policy as central banks address rising inflation.
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In its Global Financial Stability Report released during the IMF-World Bank annual meetings in Bangkok, Thailand, the IMF cautioned about the deterioration of sovereign bond risk, predicting a "sharp rise in sovereign bond yields." The report highlighted that high debt and rollover risks contribute to the market's vulnerability to fiscal and inflation shocks. Last week, the IMF noted that global public debt had nearly reached its highest level since World War II, projected to surpass 100% of GDP soon.
A significant increase in yields could reduce asset values via higher discount rates, affecting various sectors, including AI-related investments, and diminishing the value of government bonds used as collateral. The IMF pointed out a notable increase in borrowing by AI firms, which are competing with government bonds for investor interest. Since 2024, the share of investment-grade bond issuance by hyperscalers has surged from less than 1% to 10%. Tech companies such as Google and Meta have raised hundreds of billions in debt amid the global AI expansion.
Marc Seidner, Chief Investment Officer at Pacific Investment Management, remarked that while AI-linked debt issuance competes for capital, it may not be the primary cause of rising yields. The IMF also noted that hedge funds' increasing holdings of U.S. Treasuries might lead the market to be "susceptible to a disorderly unwind," with concerns about rising leverage among hedge funds. Data from the Federal Reserve indicated that hedge funds' share of U.S. Treasuries rose from about 4% in 2022 to approximately 9% in 2025, primarily through arbitraged strategies.
Caio Ferreira, IMF deputy division chief for financial supervision, raised concerns over the interconnected positions held by hedge funds, warning that if these funds simultaneously unwind their strategies, it could amplify market impacts. On a positive note, liquidity remains stable in the U.S., Europe, and the UK, but Japan’s bond market has seen deteriorating liquidity and increased yield volatility since the end of yield curve control.
The IMF advised debt managers to extend the maturities of their debt to mitigate rollover risks associated with transitioning from long-term to short-term borrowing.
Additionally, the IMF reported on a pattern of "circular" financing deals involving AI firms. Since 2023, 14 publicly disclosed transactions have redirected about $300 billion of equity, primarily from hyperscalers, to financially weaker AI firms, alongside $650 billion in debt. These deals often included $1.4 trillion in future revenue commitments, raising concerns among IMF officials. Jason Wu from the IMF noted that the intertwining revenue promises could lead to significant losses if AI commercialization does not meet expectations, potentially creating a "triple whammy" effect on investments and revenue.
Specific AI companies face heightened risk due to this concentration of finance and potential interdependencies, suggesting that difficulties within these entities could pose systemic risks to the broader market.