BANGKOK – In a recent report, the International Monetary Fund (IMF) has issued grave warnings regarding the potential instability in the sovereign bond markets. This analysis comes against a backdrop of rising inflation, escalating public debt, and the increasing borrowing activities of artificial intelligence (AI) firms. Such dynamics could lead to a disorderly surge in government bond yields.
The IMF’s insights were released during the annual meetings of the IMF and World Bank in Bangkok, where over 18,000 delegates convened to discuss global economic conditions. The fund noted a troubling trend as government bond yields in various advanced economies have reached multi-decade highs. Factors contributing to this rise include soaring energy prices stemming from conflicts in the Middle East and expectations of tighter monetary policies by central banks looking to address surging inflation rates.
Heightened Debt Levels and Risk of Yield Surge
The IMF’s latest Global Financial Stability Report highlights a critical warning: the vulnerability of sovereign bonds may worsen, possibly resulting in a “sharp rise in sovereign bond yields.” As global public debt approaches an unprecedented level since World War II—hovering close to 100% of global GDP—the IMF emphasized that high debt burdens and rollover risks render bond markets susceptible to fiscal and inflation shocks.
“The impact could be severe given the foundational importance of sovereign bond markets,” the report stated. An abrupt increase in bond yields could lead to diminished asset values, particularly affecting AI-related investments, while also reducing the worth of government bonds utilized as collateral.
Additionally, the report points out the escalated borrowing by AI companies, which has emerged as a competitor for investor capital traditionally allocated to sovereign bonds. The share of global investment-grade bonds issued by major tech firms has surged dramatically from under 1% in 2024 to 10% today, further straining the bond market.
Impacts and Concerns from Hedge Fund Activities
On another front, the IMF expressed concerns about hedge funds significantly increasing their holdings in U.S. Treasuries, with their share rising from approximately 4% in 2022 to about 9% in 2025. This trend has created a potential risk for a “disorderly unwind” of positions due to rising leverage. The report noted that while some leveraged trades have already unwound without disrupting the short-term loan market, existing leverage levels remain a notable concern.
Caio Ferreira, IMF deputy division chief for financial supervision and regulation, indicated that overlapping positions among hedge funds could exacerbate impacts during collective unwinds. Despite these concerns, liquidity remains stable in the U.S., Europe, and the U.K., though Japan’s market liquidity has deteriorated due to increased yield volatility following the end of its yield curve control.
Concerns Over ‘Circular’ Financing in AI Sector
The IMF further highlighted a worrying trend of ‘circular’ financing arrangements among AI enterprises. Since 2023, a series of 14 publicly disclosed deals funneled approximately $300 billion in equity and $650 billion in debt into financially weaker AI companies, primarily led by hyperscalers. These arrangements present a unique challenge because they involve significant “future revenue commitments” through services or chip orders, which differ from traditional financing structures.
Jason Wu, an assistant director at the IMF, explained that “the future revenue commitments” introduce a layer of circularity to these deals. If the anticipated returns from AI commercialization fail to materialize, it could result in a disastrous scenario where devalued equities, unmanageable debt, and unmet revenue commitments converge, leading to widespread financial losses.
The IMF cautioned that this heavy concentration of financing and revenue commitments in select AI firms poses risks not only to those entities but to the broader market as well. “If there are issues with these companies, then the circularity would pose risk to the market,” Wu clarified.
