The International Monetary Fund warned Tuesday that sovereign bond yields could rise in a disorderly fashion, driven by mounting public debt, resurgent inflation, and surging borrowing by AI companies competing with governments for investor capital.
The warning appeared in the IMF's October Global Financial Stability Report, published Tuesday on the sidelines of the IMF-World Bank Annual Meetings in Bangkok, Thailand. The fund said that while financial markets had remained resilient, backed by solid economic growth and strong corporate earnings, three risks could trigger a sharp tightening of financial conditions: an AI-related market correction, a sharp rise in sovereign bond yields, and major cyberattacks.
Regarding sovereign bond markets, the IMF cautioned that elevated debt burdens and rollover pressures leave government debt "susceptible to more frequent fiscal and inflation shocks." A sharp yield rise would mark down asset values through higher discount rates and erode the value of government bonds posted as collateral, the fund said.
AI-sector borrowing has added a new source of strain. The IMF said hyperscalers now account for 10% of global investment-grade bond issuance, up from under 1% in 2024, with the bulk of that debt carrying longer maturities that puts it in direct competition with government bonds for investor capital.
The fund also flagged what it called "circular" financing arrangements among AI firms. The IMF counted 14 publicly disclosed arrangements since 2023 in which hyperscalers directed approximately $300 billion in equity into financially weaker AI companies, paired with $650 billion in debt, in exchange for $1.4 trillion of future revenue commitments through services or chip orders, according to CNBC. Jason Wu, assistant director of the IMF monetary and capital markets department, said at a press briefing Tuesday that if AI commercialization falls short, equity investments would lose value, debt could become difficult to service, and revenue commitments might not materialize — what he called a "triple whammy."
Hedge funds' growing holdings of U.S. Treasuries add further vulnerability. Their share of the Treasury market rose to about 9% in 2025 from roughly 4% in 2022, the IMF said, citing Federal Reserve data. Caio Ferreira, who serves as IMF deputy division chief for financial supervision and regulation, pointed to rising leverage and increasingly overlapping fund positions as factors that could amplify any collective unwinding.
Bond market risks have deteriorated since the IMF's April report, the fund said, with elevated energy prices lifting government bond yields across a number of advanced economies. The fund urged debt managers to lengthen maturities and called on policymakers to put public debt on a sustainable path.
Those warnings follow IMF Managing Director Kristalina Georgieva's remarks in Singapore last week, where she warned that persistently high energy prices, an uneven AI investment boom, and record public debt were threatening global growth. Georgieva said benchmark government bond yields in the United States, Germany, and Japan had each risen to multi-decade highs, and called for credible medium-term fiscal consolidation in high-debt advanced economies.
Treasury yields had also climbed sharply in the days before the IMF's report. The 10-year and 30-year Treasury yields hit 24-year highs of 5.365% and 5.733%, respectively, last week, before pulling back modestly after well-received government bond auctions.