IMF warns of AI correction and rising bond yields as global market risks

The International Monetary Fund has warned that a correction in AI-related investment, rising sovereign bond yields and cyberattacks could threaten global financial stability, even as markets have so far remained resilient, according to a Reuters report on the IMF's latest Global Financial Stability Report. The fund cautioned investors against complacency, arguing that existing vulnerabilities could amplify shocks and create systemic risks. It said AI investment has helped offset economic pressures stemming from the war in the Middle East and broader policy uncertainty, but noted growing evidence that AI development may require less capital than anticipated and that its economic benefits could fall short of expectations.

Athanasios Vamvakidis, deputy director of the IMF's Monetary and Capital Markets Department, warned that an AI market correction could hit the real economy through reduced wealth and investment, with spillovers across global markets. The IMF flagged leverage in AI-related investment as a particular concern: hyperscalers now make up 10% of global investment-grade bond issuance, compared with less than 1% in 2024, which increases the potential for forced selling and volatility in a downturn. The fund urged policymakers to curb excessive leverage, including exposure via derivatives and margin loans.

Sovereign bond markets were identified as a second source of risk. Higher energy prices, elevated public debt and persistent fiscal deficits are adding upward pressure on yields, and markets face growing difficulty absorbing large government and private debt issuance as central banks shrink their balance sheets and financing relies more on price-sensitive investors. The report noted, however, that bond markets have so far absorbed these pressures without significant disruption, including hedge funds unwinding some repurchase agreement borrowing without triggering wider instability.

Cybersecurity remains a concern, particularly in emerging markets, where limited resources and reliance on a small number of technology providers heighten vulnerability. According to the IMF, software providers had almost no time to address vulnerabilities before exploitation in more than 70% of cases recorded in 2026, up 20 percentage points from the prior year, and AI could further increase the sophistication of attacks.

IMF stress tests indicate global banks retain broadly resilient capital buffers under a hypothetical downturn involving an AI slowdown and bond market instability. However, banks accounting for 22% of global banking assets were found to have weak capital levels under that scenario, compared with 18% in the IMF's 2025 assessment.