IMF warns about major economic risks and a ‘disorderly’ rise in bond yields

The International Monetary Fund (IMF) released its October Global Financial Stability Report on Tuesday, which outlines three major threats to global economies: an AI market correction, spiking government bond yields and cyberattacks.

Although global economies have proven mostly resilient so far, the IMF’s directors are urging policy makers and business leaders to take immediate action to mitigate the risk from these potential “shocks.”

“Directors broadly concurred that risks to the outlook remain skewed to the downside,” the report said.

Rising bond yields have been a warning sign for financial markets in recent months amid the Iran war’s risk to global economies, and the IMF says those risks are becoming more of a concern.

Bonds are essentially loans, where governments or companies look to borrow money from the general public, and those bond purchasers expect a return or interest on that borrowed money, which is known as the yield on those bonds.

Those yields fluctuate regularly, based on various economic factors as well as supply and demand for those bonds, and yields have been spiking in recent months amid economic uncertainty and geopolitical conflicts, rising inflation and government debt, and expectations of higher interest rates.

The yield on the 10-year U.S. government treasury was at 5.22 per cent as of publication, down from a peak of more than 5.3 per cent last week and up from 4.24 per cent six months ago.

The IMF said bond market risks have worsened since its April report, as higher energy prices have driven government bond yields up.

“Resurgent inflation or fiscal concerns could trigger a sharp rise in sovereign bond yields and spark broader market turmoil given the foundational importance of sovereign bonds. High public debt and rollover risks remain unresolved, increasing the chances that a rise in yields could occur in a disorderly manner,” the report said.

“These developments suggest that bond market risks have worsened since the April 2026 Global Financial Stability Report. A crystallization of these fragilities could lead to market turmoil.”

Artificial intelligence companies have attracted trillions of dollars in investment from stock markets and governments in just a few years. That rate of growth has led some analysts to bet on an AI bubble bursting in the near future.

The IMF report highlights the risk of an AI market correction, which happens when a business, industry or sector is considered overvalued. That sudden realization may trigger a mass selloff of people’s stocks and other assets in technology companies.

If that happens, the IMF report says there could be a dramatic ripple effect that will hurt global economies because of the amount of money invested in AI.

“Weaker or less durable AI investments and profitability could be a shock that triggers a market correction. Growing evidence suggests that AI capabilities can be delivered at lower investment levels or that potential economic gains may not be as large as expected,” the report said.

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

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.

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 defence more difficult.

Canadian academics have also warned AI hack attempts are going to become more common unless policy makers and industry leaders take decisive action.

The IMF says cyber threats are not only becoming more common because of how quickly economies have shifted to a digital world, but the emergence of AI within that digital environment has “expanded the attack surface.”

“Cyber threats constitute a growing systemic risk as financial services become more digital and interconnected. For their part, frontier AI models are emerging as both powerful enablers of cyberattacks and critical defensive tools,” the report said.

“These risks by themselves do not necessarily threaten financial stability, but they could become a systemic risk—impairments to key financial intermediation and credit provision, with serious negative economic effects— if they are amplified by financial vulnerabilities.”