IMF Warns of Rising Government Bond Yields Amid Inflation and Debt Pressures
- The IMF cautions that government bond yields may rise sharply due to inflation, debt, and AI-related borrowing.
- Global public debt is nearing its highest level since World War II and could exceed 100% of GDP shortly.
- Liquidity remains stable in major markets, but Japan’s bond market liquidity is deteriorating.
BANGKOK – The International Monetary Fund (IMF) issued a warning on Tuesday regarding the potential for a disorderly rise in government bond yields. This concern stems from increasing inflation rates, mounting national debt, and growing borrowings related to artificial intelligence. The agency highlighted that these factors are adding pressure to sovereign bond markets.
According to the latest Global Financial Stability Report, government bond yields in various advanced economies have reached multidecade highs primarily due to rising energy costs linked to conflicts in the Middle East and anticipated tightening of monetary policies by central banks seeking to manage inflation. The report was presented during the IMF-World Bank annual meetings in Bangkok, Thailand, gathering over 18,000 delegates to examine the global economy and financial system.
The IMF noted that high debt levels and risks associated with debt rollover have rendered the bond market more vulnerable to fiscal and inflation shocks. In a preceding warning, the IMF indicated last week that global public debt is approaching levels not seen since World War II, poised to surpass 100% of GDP soon.
“Impact could be severe given the foundational importance of sovereign bond markets,” the IMF stated. A rapid increase in yields would negatively affect asset valuations due to higher discount rates, including for assets tied to AI, and diminish the worth of government bonds used as collateral.
Additionally, the report pointed to a significant rise in borrowings by AI companies competing for investor capital, which adds further strain on bond markets. The share of global investment-grade bond issuance from hyperscalers has surged from less than 1% to 10% since 2024.
Major technology firms, including Alphabet Inc.’s Google and Meta Platforms, have raised substantial debt funding this year, totaling hundreds of billions of dollars, as part of the global AI infrastructure expansion.
Marc Seidner, Chief Investment Officer of non-traditional strategies at Pacific Investment Management, remarked, “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.”
On a positive note, the IMF reported stable liquidity conditions in the United States, Europe, and the United Kingdom, with market operations maintaining an orderly nature. However, ongoing leveraged Treasury basis trades from hedge funds have unwound partly, leaving the market susceptible to potential disorderly unwinding episodes.
As of 2025, hedge funds accounted for about 9% of U.S. Treasuries, up from around 4% in 2022, primarily through highly arbitraged strategies, as noted in the IMF’s findings citing Federal Reserve data. Conversely, Japan’s liquidity situation continues to deteriorate, with increased yield volatility evident in its government bond market since the cessation of yield curve control.
The IMF urged debt managers to lengthen maturities, cautioning that strategies converting long-term debt into short-term borrowings on a large scale could amplify rollover risks.
News Courtesy of CNBC
