IMF warns: Debt and inflation risks worsen, bond yields may soar "disorderly"

The IMF warned that government bond yields could rise "disorderly" as debt and inflation risks worsen. (Reuters photo)

[Financial Channel/Comprehensive Report] The International Monetary Fund warned on Tuesday (13th) that government bond yields may rise "disorderly" as rising inflation, increasing debt and AI-related borrowing put pressure on the sovereign bond market.

"CNBC" reported that government bond yields in many developed economies have climbed to their highest levels in decades due to rising energy costs caused by conflicts in the Middle East and expectations that central banks will tighten monetary policy to curb rebound inflation.

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In its latest Global Financial Stability Report, the IMF warned that sovereign bond risks may worsen and warned that sovereign bond yields will "rise sharply." The report was released on Tuesday as part of this week's IMF-World Bank annual meeting in Bangkok, Thailand. More than 18,000 delegates gathered to discuss the state of the world's economic and financial systems.

The report noted that high debt burdens and rollover risks make bond markets more vulnerable to frequent fiscal and inflationary shocks. The IMF warned last week that global public debt is close to its highest level since World War II and is about to exceed 100% of GDP.

The IMF said on Tuesday that the impact could be severe given the fundamental importance of sovereign bond markets. A sharp rise in yields would reduce the value of assets, including AI-related assets, through higher discount rates, and weaken the value of government bonds used as collateral.

The IMF also pointed out that AI company lending has grown exponentially and competed with sovereign bonds for investor demand, which has put additional pressure on the bond market. The report said that since 2024, hyperscale data centers have risen from less than 1% to 10% of all investment-grade bond issuance.

In the global wave of AI construction, technology giants such as Alphabet's Google and Meta, as well as ultra-large-scale data centers and AI laboratories, have borrowed hundreds of billions of dollars this year.

The IMF mentioned that hedge funds have been increasing their holdings of government bonds, leaving the market vulnerable to a "disorderly collapse." The IMF quoted Federal Reserve data as saying that hedge funds' holdings of U.S. debt rose from about 4% in 2022 to about 9% in 2025, mainly through high arbitrage strategies.

The IMF has warned about intricate "circular" transactions among AI companies. Since 2023, 14 publicly disclosed transactions have injected approximately US$300 billion (approximately NT$9.67 trillion) in assets into AI companies with weaker financial conditions, while also increasing US$650 billion (approximately NT$20.96 trillion) in debt. In exchange, investors received "future revenue commitments" of US$1.4 trillion (approximately NT$45.16 trillion) through services or chip orders, the IMF said.

The assistant director of the IMF's Monetary and Capital Markets Department said at a press conference that what is special about these agreements is the revenue commitment, which is different from past transactions and therefore has a circular nature. However, if there are doubts about the commercialization of AI, the value of asset investments will shrink, debt repayments may become difficult, and future revenue promises will not be realized, which will be a "triple blow."

The report points out that if such large funding and revenue commitments are concentrated in a few AI companies, under this concentration, certain companies and nodes will be particularly vulnerable. If there is a problem with these entities, then this circularity will pose a risk to the market.

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