Global Bond Sell-Off Likely to Persist Amid AI Debt and Deficits
ICICI Bank warns that rising government debt and massive AI infrastructure borrowing will keep global bond yields elevated through 2027.
The global bond market is facing a prolonged period of turbulence, with a significant global bond sell-off expected to continue in the near term. According to a recent report by ICICI Bank Research, a combination of soaring government debt, widening fiscal deficits, and an unprecedented surge in borrowing for artificial intelligence (AI) infrastructure is keeping long-term yields on an upward trajectory.
Structural Pressures Driving Yields Higher
The report suggests that the current market volatility is not merely a temporary fluctuation but is driven by deep-seated structural factors. Yields are projected to climb further before potentially reaching a peak in early 2027. This trend is already evident in major economies; the 10-year US Treasury yield recently touched 5.3 per cent in late September and early October, marking its highest level since 2002. Similar multi-decade highs have been observed in Germany, France, the UK, and Japan.
A primary driver behind this movement is the ballooning level of public debt. The report highlights several alarming trends:
- Rising Deficits: The global fiscal deficit is projected to hit approximately 5.2 per cent of GDP in 2026, which is about 170 basis points higher than pre-pandemic levels.
- Debt-to-GDP Ratio: Global public debt is forecasted to exceed total global GDP by the year 2030.
- Servicing Costs: The combination of high debt volumes and increased borrowing costs is expected to intensify pressure on debt servicing globally.
The 'Reverse Crowding Out' Effect of AI
A significant and relatively new pressure point identified by ICICI Bank is the massive investment boom in AI infrastructure. As tech giants race to build the future of computing, their hunger for capital is creating intense competition for long-term funding.
The report introduces the concept of "reverse crowding out," where massive private-sector borrowing—specifically for AI—puts additional upward pressure on government bond yields. The scale of this borrowing is staggering:
AI-related companies are estimated to raise around USD 500 billion through bonds in 2027. To put this in perspective, this amount is comparable to the projected USD 400-500 billion of US long-term Treasury supply. US hyperscalers have already utilized USD 220 billion in debt instruments in 2026, with capital expenditure expected to reach USD 729 billion this year and soar to USD 1.069 trillion in 2027.
Monetary Policy and Potential Relief
Beyond debt and AI, monetary policy remains a critical factor. With the Federal Reserve raising rates by 25 basis points in September and other major central banks tightening their policies, markets are pricing in further increases. This ongoing tightening adds consistent upward pressure to yields.
However, the report notes that the sell-off may eventually consolidate if certain conditions are met. Potential triggers for a stabilization in the bond market include:
- A faster resolution to the ongoing conflicts in West Asia.
- A reduction in global oil prices.
- A moderation in AI-related borrowing as investments begin to generate tangible returns and companies transition to funding capital expenditure through operating cash flows.