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

The International Monetary Fund (IMF) has issued a warning regarding potential risks to global financial markets, citing artificial intelligence (AI) as a possible catalyst for a correction in asset prices. In its latest Global Financial Stability Report, the IMF cautioned against complacency, acknowledging that significant risks could arise from a slowdown in AI-driven investments, rising government bond yields, or major cyberattacks.

These risks, while not inherently threatening financial stability, could become systemic if they are amplified by underlying vulnerabilities, the group noted.

The IMF highlighted that AI investments have thus far helped offset the economic impacts of the Middle East conflict and overall policy uncertainty. However, there is growing evidence that AI capabilities may not require as much investment or generate as large economic gains as previously anticipated. Should AI momentum slow, the IMF warned that a concentration of leverage in the AI sector could exacerbate any shock through forced selling and increased market volatility.

Bond market risks have worsened since the IMF's April report, driven by higher energy prices and the need for central banks to raise interest rates to combat inflation. This could place additional burdens on nations with short-term debt and unresolved fiscal deficits. The IMF cautioned that banks' capital cushions remain strong even in a hypothetical downturn triggered by an AI slowdown and bond market fragility, but warned of "pockets of weakness" among financial institutions.

Policymakers are urged to curb excessive leverage, including derivatives and margin loans, and to address public debt sustainably.