IMF cites AI slowdown, spiking yields as looming global market risks

The International Monetary Fund (IMF) warned today (13 October) against "complacency" in global financial markets, citing risks from an artificial intelligence-driven sell-off, rising government bond yields and cyberattacks as potential threats to markets that have so far remained resilient.

In its latest Global Financial Stability Report, the IMF cautioned that a slowdown in AI profits or investment could trigger a correction in related asset prices, potentially spilling over into broader markets. Such a sell-off, a spike in sovereign bond yields or a major cyberattack were among the "plausible near-term catalysts" policymakers should monitor, the fund said.

"These risks by themselves do not necessarily threaten financial stability but could become systemic...if they are amplified by underlying vulnerabilities," the IMF said in the semi-annual report, adding that financial stability risks remain elevated.

The IMF said AI investment had so far helped offset economic headwinds from the war in the Middle East and broader policy uncertainty. However, it noted "growing evidence" that AI capabilities might not require as much investment as previously expected, or that the potential economic gains might be smaller than anticipated.

A slowdown in momentum could expose growing leverage in the AI sector, potentially exacerbating any shock through forced selling and increased volatility. For example, hyperscalers now account for 10% of global investment-grade bond issuance, up from less than 1% in 2024.

"The consequences of an AI correction could be global," the IMF warned, urging policymakers to curb excessive leverage, including through derivatives and margin loans.

Rising yields

The IMF said bond market risks had worsened since its April report, as higher energy prices pushed government bond yields upwards. Policymakers may need to raise interest rates to tackle inflation, potentially worsening debt burdens for countries refinancing short-term debt. In addition, more price-sensitive investors could put further upward pressure on yields, while market liquidity could deteriorate amid increased volatility.

Each of these factors could trigger a sudden rise in bond yields, the IMF warned, adding that historically high sovereign debt levels and unresolved fiscal deficits in major economies were intensifying the pressure.

However, bond markets had so far weathered the stress, with hedge funds able to unwind some of their borrowing through repurchase agreements without triggering turmoil in repo markets, it said. The IMF urged policymakers to put public debt on a sustainable path.

The fund also warned that technological developments and growing reliance on a small number of critical service providers were making cyber defence more difficult. In more than 70% of cases so far in 2026, software providers had almost no time to patch vulnerabilities before they were exploited, a rise of 20 percentage points from a year earlier, the IMF said.

AI could help address some of these risks, but AI models were also making cyberattacks more sophisticated.

A major attack affecting a critical service or financial institution could undermine confidence and quickly send shockwaves through financial markets, the IMF cautioned. It urged policymakers to strengthen cybersecurity capabilities, including through stricter oversight of third-party technology vendors.

The IMF said its stress-test models showed that banks' capital buffers remained robust even under a hypothetical downturn triggered by an AI slowdown and bond market fragility. However, it warned of "pockets of weakness", with banks accounting for 22% of global banking assets found to have weak capital levels under the test, up from 18% in the 2025 assessment.