The International Monetary Fund (IMF) has issued a warning regarding the potential for government bond yields to rise sharply, driven by factors such as escalating inflation, high public debt, and increased borrowing by AI firms.
In its Global Financial Stability Report, released during the IMF-World Bank annual meetings in Bangkok, the IMF highlighted that yields in advanced economies have surged to multidecade highs, influenced by rising energy costs linked to geopolitical tensions and expectations of tighter monetary policy.
The report noted that global public debt is nearing its highest level since World War II, projected to exceed 100% of GDP soon. This situation poses risks to the bond market, making it vulnerable to fiscal and inflation shocks.
The competition for investor capital from AI-related debt issuance has also intensified, with tech giants raising substantial amounts of money, thereby straining the bond market further. While liquidity remains stable in major markets like the U.S., Europe, and the U.K., the IMF cautioned that the remaining leverage in hedge funds could lead to a disorderly market unwind.
The report advises debt managers to consider lengthening maturities to mitigate rollover risks associated with short-term borrowing strategies