BANGKOK – The International Monetary Fund warned Tuesday that government bond yields could rise in a disorderly fashion, as rising inflation, mounting debt and AI-related borrowings pressure sovereign bond markets.

Government bond yields in several advanced economies have climbed to multidecade highs, driven by higher energy costs due to the Middle East conflict and expectations for tighter monetary conditions as central banks look to curb resurgent inflation. 

In its latest Global Financial Stability Report, the fund warned that sovereign bond risk could deteriorate, warning of "a sharp rise in sovereign bond yields." The report was released Tuesday as part of the IMF-World Bank annual meetings in Bangkok, Thailand, this week, where more than 18,000 delegates gathered to discuss the state of the world economy and the financial system. 

High debt load and rollover risks make the bond market "susceptible to more frequent fiscal and inflation shocks," the report said. The IMF had warned last week that global public debt had reached near its highest level since World War II and was on track to soon exceed 100% of GDP. 

"Impact could be severe given the foundational importance of sovereign bond markets," the IMF said Tuesday. A sharp rise in yields would mark down asset values through higher discount rates, including for AI-related assets, and erode the value of government bonds posted as collateral. 

IMF also noted the exponentially rising borrowing by AI firms — that compete with sovereign bonds for investor demand — as an additional source of strain on bond markets. Hyperscalers' share of global investment-grade bond issuance has risen to 10% from less than 1% since 2024, the report said.

The global AI buildout has seen tech giants, such as Alphabet Inc's Google, Meta Platforms, hyperscalers and AI labs raising hundreds of billions of dollars in debt this year.

"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," according to Marc Seidner, CIO of non-traditional strategies at Pacific Investment Management.

Hedge funds' growing holdings of Treasuries leave the market "susceptible to a disorderly unwind," the IMF said. Leveraged basis trades have partly unwound without notable pressure in the short-term loan market but the leverage that remains is a concern.

Hedge funds' share of U.S. Treasuries rose to about 9% in 2025 from about 4% in 2022, mostly through highly arbitraged strategies, the IMF said, citing data from the Federal Reserve. 

Caio Ferreira, IMF deputy division chief for financial supervision and regulation, said the worry stems from hedge funds' rising leverage and their increasingly overlapping positions, meaning multiple funds are holding the same trades, potentially amplifying impact from a collective unwinding.

On the bright side, liquidity has held up in the U.S., Europe and the U.K., the IMF said. Japan is the exception: liquidity in its government bond market has "continued to deteriorate" as yield volatility has risen since the end of yield curve control.

The fund urged debt managers to lengthen maturities, warning that rollover risk could be exacerbated by strategies that replace long-term debt with short-term borrowing on a large scale. 

The IMF sounded the alarm over a web of "circular" financing deals among AI firms.

Since 2023, 14 publicly disclosed deals channeled about $300 billion of equity, led by hyperscalers, into financially weaker AI firms, alongside $650 billion of debt. In exchange, the investors secured $1.4 trillion of "future revenue commitments" through services or chip orders, the IMF said.

The revenue promises are what set the deals apart, Jason Wu, assistant director of the IMF monetary and capital markets department, said at a press briefing on Tuesday. "What makes this a little bit unusual compared to previous deals is the future revenue commitments, hence the circularity."

If AI commercialization falls short, the losses could arrive together. "If there are questions about the monetization in AI, the equity investments will deplete in value, the debt may be difficult to service, and the revenue commitments in the future may not materialize," Wu said, describing what he called a "triple whammy."

Such heavy financing and revenue promises cluster in a handful of AI firms, the report said. Due to that concentration, "there are certain companies and nodes that are particularly exposed," Wu said. "If there are some kind of issues with those entities, then the circularity would pose risk to the market."