Traders work on the American Stock Exchange (AMEX) floor of the New York Stock Exchange (NYSE) on Monday, March 9, 2026 in New York, USA.
Michael Nagle | Bloomberg | Getty Images
BANGKOK – The International Monetary Fund warned on Tuesday that government bond yields could rise uncontrollably as rising inflation, rising debt and AI-related borrowing weigh on sovereign debt markets.
Government bond yields in several developed countries have risen to their highest levels in decades, driven by rising energy costs due to conflict in the Middle East and expectations that central banks will tighten monetary policy to curb a flare-up in inflation.
In its latest Global Financial Stability Report, the fund warned that sovereign debt risks could worsen, warning of a “sharp rise in sovereign bond yields”. The report was released on Tuesday as part of the IMF/World Bank Annual Meetings held this week in Bangkok, Thailand. The annual meeting brought together more than 18,000 participants to discuss the current state of the global economy and financial system.
The report said high debt burdens and rollover risks have made bond markets “more susceptible to more frequent fiscal and inflationary shocks.” The IMF warned last week that global public debt is near its highest level since World War II and will soon exceed 100% of GDP.
“Given the fundamental importance of government debt markets, the impact could be severe,” the IMF said on Tuesday. A sharp rise in yields will devalue assets, including AI-related assets, through higher discount rates and reduce the value of government bonds pledged as collateral.
The IMF also noted that a sharp increase in borrowing by AI companies, which compete with sovereign debt for investor demand, is an additional strain on bond markets. The share of global investment-grade corporate bond issuance by hyperscalers has increased from less than 1% to 10% since 2024, according to the report.
The global AI ramp-up has seen the rise of technology giants such as: Alphabet Inc. Google, meta platformhyperscalers and AI labs are raising hundreds of billions of dollars in debt this year.
“AI-related issuance, much of it long-term, has grown large enough to compete with government bonds for investor money, even if it doesn’t appear to be the dominant driver of yield,” said Mark Seidner, chief investment officer of nontraditional strategies at Pacific Investment Management.
On the bright side, liquidity measures remain stable in the US, Europe and the UK, and market functioning is “orderly”, the IMF said.
The report said hedge funds’ leveraged U.S. Treasury-based trades have been partially unwound without any noticeable pressure on the repurchase market, but residual leverage leaves the market “susceptible to chaotic unwinding.”
Citing Federal Reserve data, the IMF said hedge funds’ share of U.S. debt rose from about 4% in 2022 to about 9% in 2025, primarily through sophisticated arbitrage strategies.
Japan is an exception in terms of liquidity, with the government bond market “continuing to deteriorate” as yield volatility has increased since the end of yield curve control, according to the IMF.
The fund warned that its strategy of replacing long-term debt with short-term borrowing on a large scale could exacerbate rollover risk, and urged bond managers to extend maturities.
