The IMF warned that rising government debt and inflation, and increased borrowing by AI companies, could trigger a sharp jump in government bond yields. [Photo: Shutterstock]
The International Monetary Fund warned on Oct. 13 that inflation, rising government debt and increased borrowing by artificial intelligence-related companies could weigh on government bond markets and cause government bond yields to rise sharply and become more volatile.
Energy costs rising due to conflict in the Middle East and expectations of tighter policy by central banks to curb inflation have combined to push government bond yields in several advanced economies to their highest levels in decades.
According to CNBC, the IMF warned in its latest Global Financial Stability Report that sovereign bond risks could worsen and cautioned of the possibility of a sharp rise in government bond yields. The report was released to coincide with the IMF-World Bank annual meetings being held this week in Bangkok, Thailand. More than 18,000 delegates attended the meetings to discuss the state of the global economy and the financial system.
The report said sovereign bond markets could be exposed more frequently to fiscal and inflation shocks because of high debt burdens and refinancing risks. The IMF also said last week that global public debt was nearing its highest level since World War Two and forecast it would soon exceed 100 percent of gross domestic product.
The IMF said shocks could be severe because government bond markets are the bedrock of the financial system. A sharp rise in government bond yields would push up discount rates and lower asset values, and AI-related assets could also be affected. The value of government bonds posted as collateral could also fall.
The IMF also pointed to a surge in borrowing by AI companies competing with government bonds for investor funds as another factor adding pressure to bond markets. The report said hyperscalers’ share of global investment-grade bond issuance has risen to 10 percent from less than 1 percent since 2024.
Big technology companies and hyperscalers such as Google’s parent Alphabet and Meta Platforms, as well as AI research labs, raised hundreds of billions of dollars this year by issuing bonds and other means to build AI infrastructure.
Marc Seidner (마크 사이드너), chief investment officer for non-traditional strategies at Pacific Investment Management Co (PIMCO), said issuance of long-maturity AI-related bonds has grown large enough to compete with government bonds for investor funds, but for now does not appear to be a dominant factor moving government bond yields.
The IMF said liquidity indicators in the United States, Europe and Britain were stable and markets were functioning in an orderly manner. Hedge funds unwound some basis trades that use borrowing to exploit the gap between cash and futures prices for U.S. Treasuries, but there was no clear pressure in the repurchase agreement market. It warned, however, that remaining leverage leaves markets vulnerable to “disorderly unwinds.”
Citing Federal Reserve data, the report said hedge funds’ share of the U.S. Treasury market rose to about 9 percent in 2025 from about 4 percent in 2022. Japan was an exception, with liquidity in its government bond market continuing to deteriorate. The IMF said increased interest rate volatility after the end of yield curve control was a factor.
The IMF recommended that debt management authorities lengthen the maturity of government bonds. It warned that strategies that replace large amounts of long-term debt with short-term borrowing could increase refinancing risks.