Much has been heard recently about the risk of a bond market crisis, with US government bond yields this month reaching their highest levels since 2002, with some warning of 6 per cent US Treasury benchmarks.
Yields in several advanced economies globally have also hit multi-decade highs on the back on inflation fears amid soaring energy costs.
However, a crisis related to investors losing confidence in governments’ ability to control inflation and debt levels is only part of the story.
The next bond-market crisis could start with more technical factors, an increase in issuance, a wave of selling that pushes prices lower, sparking further losses and forcing more investors to sell.
Investors demand higher returns when inflation threatens to persist, governments borrow heavily or interest rates are expected to remain elevated. But markets can also move for reasons that have little to do with a sudden deterioration in economic fundamentals.
When bond prices fall, leveraged investors can face margin calls or tighter financing conditions. Funds may need to sell assets to raise cash, while institutions managing interest-rate exposure adjust their hedges. Those transactions can put further downward pressure on prices, pushing yields higher and generating new losses.
In a sufficiently stressed market, even investors who believe government debt will ultimately be repaid may sell simply because they cannot afford to hold their positions.
The US Treasury market is particularly important because its securities underpin global borrowing costs, provide collateral for financial transactions and serve as a benchmark for corporate debt. A disorderly sell-off can therefore spread well beyond Washington.
The market has already demonstrated its vulnerabilities. During the disruption of March 2020, US Treasuries experienced severe dysfunction despite their status as one of the world's safest and most liquid assets.
Meanwhile, the OECD's Global Debt Report 2026 estimates that governments and companies will borrow $29 trillion from markets this year. The growing role of price-sensitive investors, alongside the retreat of central banks from bond holdings, adds to concerns about the market's capacity to absorb shocks.
The AI boom could also complicate that equation. Technology companies and infrastructure developers are competing for capital rapidly. Bloomberg reported this month that major AI-related borrowers had issued nearly half a trillion dollars of debt in 2026. The Dallas Federal Reserve estimates that AI-related investment-grade bond issuance could reach about $300 billion this year, adding significant long-term borrowing to US financial markets.
If borrowing rises sharply to finance data centres and other AI infrastructure, investors may demand higher returns, particularly if future revenues appear insufficient to justify the investment. A deterioration in profitability expectations could also undermine the value of AI-related debt, reduce financing and force companies to postpone projects, with losses and tighter credit conditions spilling into other markets.
The interaction with government borrowing matters. Heavy Treasury issuance, substantial corporate financing needs and a reassessment of AI investment returns could coincide, putting pressure on all borrowing costs.
If that happened alongside leveraged positions being unwound, an initial repricing could become more disruptive. A sharp reversal in the yen carry trade could amplify this dynamic for example, while higher Japanese bond yields may encourage domestic investors to repatriate funds rather than buy US Treasuries.
For Gulf economies, the implications extend beyond investment portfolios. US Treasury yields influence international borrowing costs, and a sustained increase can make it more expensive for regional governments and companies to issue debt, refinance obligations and finance infrastructure and economic diversification projects.
The effect is direct for Gulf economies whose currencies are pegged to the US dollar, because their monetary conditions are closely influenced by US interest rates. Gulf governments and investors are committing resources to data centres, computing capacity and digital infrastructure. If markets begin to question the returns on AI investment, financing conditions could tighten just as regional projects require more capital.
That would not necessarily derail these ambitions. Strong sovereign balance sheets and long investment horizons provide resilience. But higher funding costs and a more selective investor base could change the economics of specific projects.
AI could also generate substantial productivity gains, while higher bond yields can attract buyers and eventually stabilise prices. Neither heavy borrowing nor market volatility alone signals a systemic crisis.
But the real concern is the possibility that several pressures coincide: heavy government issuance, rising corporate borrowing, doubts about AI returns and leveraged investors forced to unwind positions.
For policymakers and investors, the priority should be to monitor market functioning as well as headline yields. Are transactions becoming harder to execute? Are funding pressures rising? Are investors demanding larger premiums to hold assets that would ordinarily be considered liquid?
The next bond-market crisis, if and when it comes, may not begin when investors decide governments are insolvent. It may begin when a crowded financing cycle meets a sudden reassessment of risk, and investors who believe in the underlying assets still find themselves forced to sell.