Global Markets Volatility 2027: Fitch Warns of AI Bubble and Bond Risks
Fitch Ratings warns of global markets volatility through 2027 due to AI spending concerns and shifting US Treasury yields.
The global financial landscape is bracing for a bumpy ride. According to a new report by Fitch Ratings, global markets volatility 2027 could remain a significant concern, driven by a cocktail of rising bond yields and skepticism over the massive amounts of capital being poured into artificial intelligence (AI).
The US Treasury Tug-of-War
While there are expectations that US government bond yields might eventually stabilize, the path forward is fraught with uncertainty. Fitch has adjusted its US policy rate forecast to 4.25 per cent through 2027, anticipating one more rate hike before 2026 concludes. This shift comes as the US Federal Reserve adopts a more hawkish stance, evidenced by the unanimous decision to raise interest rates in September—the first such move in three years.
The agency's base-case scenario suggests the US 10-year yield will retreat to 4.8% by the end of 2027. However, this stability is not guaranteed. Recent data shows the 10-year US Treasury yield hovering around 4.927 per cent, reacting to inflation data and economic growth readings.
The 'AI Spend' Red Flag
One of the most striking warnings in the report concerns the AI boom. Fitch points out that the sheer scale of capital expenditure (capex) on artificial intelligence has become a growing risk. There is a mounting concern that companies may be overestimating how much AI spending is actually sustainable in the long run.
The ratings agency highlighted a specific tension: the improving capabilities of open-weight AI models compared to frontier models. This shift, combined with aggressive investment plans, suggests that a "material reassessment" of how AI will actually make money could lead to a sudden, sharp drop in spending. Such a crash would send shockwaves through the entire AI value chain and the broader capital markets.
External Pressures and Market Competition
Beyond AI and interest rates, Fitch identified several external triggers that could push yields higher than expected:
- Geopolitical Risks: Prolonged disruptions to oil supplies via the Strait of Hormuz beyond Q1 2027 could spike crude oil prices, putting renewed pressure on bond yields.
- Japanese Asset Shifts: The compression of spreads over Japanese assets is likely slowing down net foreign purchases of US treasuries.
- The Funding Fight: As the Federal Reserve unwinds its balance sheet and AI-focused "hyperscalers" rapidly increase their bond issuance, there will be intense competition for investor funds, potentially weakening the demand for Treasuries.
"A material reassessment of long-term AI monetisation prospects could result in a sharp reduction in capex, with implications for issuers across the AI value chain and wider capital markets," Fitch warned.