The International Monetary Fund (IMF) has warned that countries with large budget gaps are more exposed when government bond yields rise, although markets are working normally for now.
Athanasios Vamvakidis, deputy director of the IMF's monetary and capital markets department, presented the October Global Financial Stability Report in Bangkok, Thailand. "The market is functioning well. There is liquidity," he said.
Vamvakidis said the rise in yields reflects higher energy prices, stubborn inflation and growing term premiums. A term premium is the extra return investors demand for holding long-term bonds instead of short-term ones. It covers uncertainty about future interest rates, inflation and the value of the bonds.
Yields on 10-year bonds rose between 27 February and 30 September 2026. The increase came from changes in expected short-term interest rates and from higher term premiums. The report says that in advanced economies the main driver is expectations of higher short-term rates because of inflation and tighter policy. In emerging markets, it is term premiums.
Yields began to climb after the pandemic, when markets saw the end of low inflation, zero or negative interest rates and central bank quantitative easing. In 2026, extra pressure has come from energy shocks linked to the conflict in the Middle East, stubborn inflation and expectations of tighter monetary policy. In some economies, growth stronger than expected has also pushed yields up. In a number of countries, bond yields hit multi-year highs.
The IMF says term premiums are at the top of their historical ranges, mostly for bonds of advanced economies. The fund points to fears of long-lasting budget deficits, high government debt and an expected rise in the supply of government bonds.
Vamvakidis said some of the sharp moves in rates come from changes in investors' positions and from mechanisms that limit losses. He said the levels and swings of interest rates are returning to what was typical in the decades before the global financial crisis. Budget gaps are not the initial driver, he said, but there is a positive link between changes in yields and those gaps.
The fund names renewed energy price rises, a correction in the artificial intelligence sector and cyber threats among the risks.
The IMF says another rise in energy prices could speed up inflation and force tighter monetary policy. Investors who are more sensitive to prices could sell long-term bonds, which would push term premiums up. Governments that have recently shortened the maturity of their debt will face higher refinancing risks, which would add to the debt burden and premiums.
If swings grow stronger, market liquidity could worsen. The bond market relies on dealers who act as go-betweens in trades, and limits on their balance sheets could force them to trade less. Together, the two factors could lead to a sharp jump in yields.
Hedge funds have cut some positions tied to the gap between government bond prices and bond futures, with no visible pressure on repo markets. High leverage remains, which carries the risk of a sudden unwinding of these positions.
Vamvakidis said the technology sector is among the main drivers of economic strength, but heavy reliance on it creates weak points. If profits are weaker than expected or investments fail to bring the expected returns, a correction in valuations could tighten financial conditions and hit the wider economy.
The IMF analysed 14 publicly announced deals in the artificial intelligence sector. They include about $300bn in equity investment, $650bn in debt financing and commitments for future revenue of $1.4 trillion.
Vamvakidis said interlinked schemes, in which investments are tied to commitments for future revenue, are an added risk. A correction could also have wider effects because international exposure to US assets linked to artificial intelligence has grown. Rising debt issuance by companies in the sector could also compete with government bonds for investor demand.
The fund called on countries to put their public debt on a sustainable path and to improve the structure of bond markets. It said central banks should keep their independence, carry out their mandates and explain their decisions clearly. This would steady inflation expectations and cut the risk of sharp moves in yields.
The IMF describes cyber threats as a growing systemic risk to the financial system. Caio Ferreira, deputy division chief in the same department, said digitalisation increases the room for attacks. Reliance on a small number of software products and cloud service providers could make a breach worse, and cyber criminals have wider access to tools, including artificial intelligence.
Emerging markets are less prepared because they have fewer resources for prevention, Ferreira said. He said they need more cybersecurity specialists, stronger supervisory bodies and better coordination during crises.