Global bond sell-off likely to continue near term as AI debt, deficits keep yields elevated: ICICI Bank
New Delhi, October 7
The global bond sell-off is likely to continue in the near term as elevated fiscal deficits, rising government debt, heavy borrowing for artificial intelligence infrastructure and expectations of tighter monetary policy continue to push up long-term yields, according to a report by ICICI Bank Research.
The report said yields could rise further before potentially peaking in early 2027, with a subsequent consolidation if oil prices ease and AI-related borrowing starts to moderate.
"We expect the bond sell-off to continue in the term as the structural factors driving it are here to stay," the report said.
The 10-year US Treasury yield had risen to 5.3 per cent in late September and early October, its highest level since 2002, while yields in Germany, France, the UK and Japan also reached multi-decade highs. The report said higher fiscal deficits and debt levels were the biggest structural drivers of the sell-off.
Global fiscal deficit is projected at around 5.2 per cent of GDP in 2026, about 170 basis points above the pre-pandemic level, while global public debt is expected to exceed global GDP by 2030. The report said elevated debt combined with higher borrowing costs would increase debt-servicing pressures.
A newer source of pressure is the AI infrastructure investment boom. AI-related companies could raise around USD 500 billion through bonds in 2027, compared with about USD 400-500 billion of US long-term Treasury supply.
ICICI Bank termed this potential competition for long-term funding "reverse crowding out", where private-sector borrowing puts additional pressure on government bond yields.
The report said US hyperscalers have already borrowed USD 220 billion through debt instruments in 2026, while their capital expenditure is projected to reach USD 729 billion this year and USD 1.069 trillion in 2027.
AI-related borrowing could peak in 2027 as investments begin generating returns and companies increasingly fund spending through operating cash flows.
Monetary policy is another pressure point. ICICI Bank noted that the Federal Reserve raised rates by 25 basis points in September, while several other major central banks have also tightened policy this year. Markets are pricing in further rate increases, adding to upward pressure on bond yields.
However, a faster resolution of the West Asia conflict, lower oil prices and a slowdown in AI borrowing could ease the pressure. "As earlier investments start generating revenue, operating cash flows could fund an increasing share of capex," the report said.
— ANI
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