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

By Pete Schroeder and Selena Li

BANGKOK/WASHINGTON, Oct 13 (Reuters) - The International Monetary Fund warned on Tuesday against "complacency" in global financial markets, citing risks from an artificial intelligence-driven selloff, rising government bond yields, or cyberattacks as potential threats facing still-resilient markets.

The IMF said in its Global Financial Stability Report that AI investments have so far helped offset economic drags from war in the Middle East and overall policy uncertainty. But it noted "growing evidence" that AI capabilities may not require as much investment, or the potential economic gains may not be as large as expected. 

 "An AI market correction will affect the real economy," Athanasios Vamvakidis, deputy director in the IMF's Monetary and Capital Markets Department, said at a press briefing in Bangkok.

He said while global risk sentiment was very strong, underpinned by solid earnings and optimism about AI, such "resilience is not necessarily safety". An AI correction would have impacts on wealth and investment that could spill into broader markets, he said. 

The risk of such a selloff, as well as a spike in sovereign bond yields or a major cyberattack, were among "plausible near-term catalysts" that policymakers should monitor, the IMF said in its report.

While each of these risks might be manageable on its own, they also could trigger vulnerabilities with potential systemic implications, Vamvakidis said.

Should the momentum in AI investment slow, the IMF noted growing leverage in the sector could exacerbate any shock by triggering forced selling and higher volatility. For example, hyperscalers now represent 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, as it called on policymakers to curb leverage use, including derivatives and margin loans, where it is "excessive."

RISING YIELDS

The IMF said bond market risks have worsened since its April report, as higher energy prices have driven government bond yields up. Historically high sovereign debt levels and unresolved fiscal deficits in major economies were adding to the pressure.

"The market is concerned about absorption potential of the huge issuance that is coming from the sovereigns and increasingly also from the private sector, at the time that central banks are shrinking their balances, and we have to rely more on price-sensitive investors," Vamvakidis said.

The IMF report said bond markets have so far dealt with the stress well, with hedge funds able to unwind some of their repurchase agreement borrowing without triggering turmoil in repo markets. The group called on policymakers to put public debt on a sustainable path.

On cyber threats, the IMF said that a lack of resources, particularly in emerging markets, and a growing reliance on a small number of critical providers was making cyber defense more difficult.

In over 70% of cases so far in 2026, software providers have had almost no time to patch vulnerabilities before they were exploited, a 20 percentage point jump from a year ago, the IMF said. It noted that while AI can help address some of these risks, models were also making cyberattacks more sophisticated.

The IMF cautioned that a major attack affecting a critical service or financial institution could undermine confidence, which could quickly ripple throughout markets.  It called on policymakers to boost cybersecurity capacity, including stricter oversight of third-party technology vendors.

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

(Reporting by Pete Schroeder in Washington and Selena Li in Bangkok; Editing by Andrea Ricci and John Mair)