IMF warns bond yields could see a 'disorderly' spike as debt, inflation risks worsen

The International Monetary Fund warned on Tuesday that government bond yields could rise in a disorderly fashion as inflation, mounting sovereign debt and AI-related borrowing put pressure on sovereign bond markets. The warning appeared in the IMF's latest Global Financial Stability Report, released as part of the IMF-World Bank annual meetings in Bangkok, Thailand. The report said sovereign bond risk could deteriorate, citing "a sharp rise in sovereign bond yields," and warned that high debt loads and rollover risks leave the market "susceptible to more frequent fiscal and inflation shocks." The IMF said the impact "could be severe given the foundational importance of sovereign bond markets." Yields in several advanced economies have already climbed to multidecade highs, driven by higher energy costs linked to the Middle East conflict and expectations of tighter monetary policy as central banks respond to resurgent inflation. A sharp rise in yields would lower asset values through higher discount rates, including for AI-related assets, and erode the value of government bonds posted as collateral.

The report flagged hedge fund positioning as a specific vulnerability. Hedge funds' share of U.S. Treasuries rose to about 9% in 2025 from about 4% in 2022, mostly through highly arbitraged strategies, citing Federal Reserve data. The IMF said this leaves the market "susceptible to a disorderly unwind." Leveraged basis trades have partly unwound without notable pressure in the short-term loan market, but remaining leverage is a concern. Caio Ferreira, IMF deputy division chief for financial supervision and regulation, said the worry stems from rising leverage and increasingly overlapping positions, which could amplify losses if funds unwind together. Liquidity has held up in the U.S., Europe and the U.K., while Japan is the exception, with liquidity in its government bond market having "continued to deteriorate" since the end of yield curve control. The fund urged debt managers to lengthen maturities, warning that rollover risk could be exacerbated by large-scale strategies that replace long-term debt with short-term borrowing.

AI-related financing was another focus. The IMF said hyperscalers' share of global investment-grade bond issuance has risen to 10% from less than 1% since 2024. Marc Seidner, CIO of non-traditional strategies at Pacific Investment Management, said 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." The IMF also flagged "circular" financing, in which 14 publicly disclosed deals since 2023 channeled about $300 billion of equity, led by hyperscalers, and $650 billion of debt into financially weaker AI firms. In return, investors secured $1.4 trillion of future revenue commitments through services or chip orders. Jason Wu, assistant director of the IMF monetary and capital markets department, said at a press briefing that if AI monetization falls short, "the equity investments will deplete in value, the debt may be difficult to service, and the revenue commitments in the future may not materialize," which he described as a "triple whammy." Because these exposures are concentrated in a handful of firms, Wu said the circularity "would pose risk to the market" if those entities face problems.