IMF Warns Bond Yields Could Spike in Disorderly Fashion

The International Monetary Fund (IMF) has warned that government bond yields could rise in a disorderly manner, citing increasing debt levels, persistent inflation, and significant borrowing by artificial intelligence (AI) companies as key pressures.

According to the IMF's Global Financial Stability Report, high debt loads and rollover risks make sovereign bond markets susceptible to "more frequent fiscal and inflation shocks." The fund recently noted that global public debt is nearing its highest level since World War II.

The report highlights that AI-related borrowing, which has grown to represent 10% of global investment-grade bond issuance from less than 1% since 2024, is competing with government bonds for investor capital. This adds another layer of strain to markets already vulnerable to shocks.

The IMF stressed that a sharp increase in yields could have "severe" consequences given the foundational importance of sovereign bond markets to the global economy. Such a move could devalue assets and erode the value of government bonds used as collateral. While liquidity remains stable in the U.S., Europe, and the U.K., Japan's government bond market is experiencing deteriorating liquidity.