The International Monetary Fund warned Tuesday that government bond yields could rise in a disorderly fashion, as rising inflation, mounting debt and AI-related borrowing pressure sovereign bond markets.
Government bond yields in several advanced economies have climbed to multidecade highs, driven by higher energy costs tied to the Middle East conflict and expectations of tighter monetary conditions as central banks seek to curb resurgent inflation. The IMF's latest Global Financial Stability Report, released as part of the IMF-World Bank annual meetings in Bangkok, Thailand, where more than 18,000 delegates gathered, warned of "a sharp rise in sovereign bond yields."
High debt loads and rollover risks make the bond market "susceptible to more frequent fiscal and inflation shocks," the report said. The IMF 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 a sharp yield rise would mark down asset values through higher discount rates, including for AI-related assets, and erode the value of government bonds posted as collateral.
AI Borrowing and Circular Financing
The IMF flagged exponentially rising borrowing by AI firms, which compete with sovereign bonds for investor demand. Hyperscalers' share of global investment-grade bond issuance has risen to 10% from less than 1% since 2024, the report said, as tech giants including Alphabet's Google and Meta Platforms raised hundreds of billions of dollars in debt this year.
"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," said Marc Seidner, CIO of non-traditional strategies at Pacific Investment Management.
