Record levels of debt have made markets "more prone to more frequent fiscal and inflation shocks," the International Monetary Fund (IMF) said, adding that sovereign bond risks have deteriorated.

Large-scale borrowing in the AI sector is intensifying pressure on markets as it competes with governments for investor capital.

Hedge fund positioning leaves the U.S. Treasury market "exposed to the risk of disorderly unwinding," with hedge funds' share of the Treasury market doubling in 2025 to roughly 9%.

The IMF also flagged a web of "circular" financing deals among AI companies, which could amplify the impact of any market pullback.

Warning on disorderly yield rises

The IMF warned on Tuesday that government bond yields could rise in a disorderly manner, pressured by rising inflation, heavy debt loads and AI-related borrowing.

Bond yields in several countries have already climbed to multi-decade highs, driven by the Middle East conflict pushing up energy costs and by market expectations that central banks will tighten monetary policy to contain a rebound in inflation.

In its latest Global Financial Stability Report, the IMF warned that sovereign bond risks could worsen further, with the potential for "a sharp spike in sovereign bond yields."

The report was released on Tuesday at the IMF-World Bank annual meetings in Bangkok, Thailand, where more than 18,000 delegates gathered to discuss the state of the global economy and financial system.

Heavy debt burdens and refinancing risks from maturing debt have made the bond market "more prone to more frequent fiscal and inflation shocks," the report said.

The IMF warned last week that global public debt is nearing a record high and will soon exceed 100% of global GDP.

"Sovereign bond markets are the cornerstone of the financial system, and if yields spike, the shock would be very severe," the IMF said in Tuesday's report.

A sharp rise in yields would weigh on asset valuations, including AI-related assets, through higher discount rates, while also eroding the value of government bonds used as collateral.

The IMF also noted that borrowing by AI companies is growing exponentially, competing with sovereign bonds for investor capital and adding further pressure to the bond market.

Since 2024, large cloud technology companies' share of global investment-grade bond issuance has risen from less than 1% to 10%, according to the report.

This year, tech giants such as Google and Meta, hyperscale computing firms and AI labs have raised large amounts of funding through bond issuance to support the global buildout of AI infrastructure.

"AI-related bond issuance is mostly long-dated, and its size has grown large enough to compete with government bonds for investor capital, although it does not appear to be the dominant driver of rising yields," said Marc Seidner, chief investment officer of non-traditional strategies at PIMCO.

Hidden risks in hedge funds

The IMF said the growing scale of hedge fund holdings of U.S. Treasuries has left the entire market "prone to disorderly unwinding."

Although leveraged basis trades have been partly unwound and short-term lending markets have not yet shown significant stress, the remaining level of leverage in the market is still a concern.

Citing Federal Reserve data, the IMF said hedge funds' share of the Treasury market rose from about 4% in 2022 to about 9% in 2025, with the vast majority using high-arbitrage strategies.

Caio Ferreira, deputy division chief in the IMF's Monetary and Capital Markets Department, said the root of the risk lies in hedge funds' rising leverage and highly concentrated positioning: many funds are betting on the same trade, and a collective unwind would amplify market shocks.

The IMF also said liquidity in the U.S., European and U.K. bond markets is currently adequate, with Japan the exception: since exiting its yield curve control policy, Japanese government bond yields have become more volatile and market liquidity has "continued to deteriorate."

The IMF called on sovereign debt management offices to extend debt maturities, warning that replacing long-term debt with large amounts of short-term borrowing on a massive scale would further amplify debt rollover risks.

Circular financing risks in AI

The IMF sounded the alarm over the intricate "circular" financing deals among AI companies.

Since 2023, 14 such deals have been publicly disclosed, the IMF said: led by large cloud technology companies, they invested about $300 billion in equity in AI companies with weaker financial strength, alongside $650 billion in debt financing; in exchange, the investors received $1.4 trillion in "future revenue commitments" in the form of service purchases or chip orders.

Jason Wu, assistant director in the IMF's Monetary and Capital Markets Department, said at a Tuesday news conference that what makes these deals unusual is precisely that future revenue commitment, which creates a circular chain of financing.

He explained the so-called "triple whammy" risk: "If AI commercialization falls short of expectations, the value of equity investments shrinks, the debt cannot be repaid, and these future revenue commitments will also fail to materialize. Multiple losses would erupt simultaneously."

The report noted that such large-scale financing and revenue commitments are highly concentrated among a small number of AI companies.

"Some companies and key nodes are exposed to extremely high risk. If these entities run into trouble, the circular financing chain will bring risks to the entire market," Wu said.