IMF flags AI leverage, bond yields, and cyber attacks as threats to market calm

Strong earnings and heavy AI spending have kept markets buoyant, but the IMF says the calm could break. Three shocks — an AI-driven correction, a spike in bond yields, or a cyberattack — could sharply tighten global financial conditions, the fund warns in its Global Financial Stability Report (pdf). Inflation from the Middle East energy shock has already pushed 14 of 33 major central banks to raise rates since 2Q, up from two in 1Q, though the moves were modest.

AI is the fund’s primary concern, and leverage is what makes it dangerous. Hyperscalers now account for 10% of global investment-grade bond issuance, up from less than 1% in 2024. The share of single stocks in leveraged ETFs has risen to 28% from 16% since 2024. Fourteen circular deals have channeled around USD 300 bn of equity and USD 650 bn of debt into weaker AI firms in exchange for USD 1.4 tn in future revenue commitments. If a firm on the receiving end runs into trouble, both sides are exposed at once — a bind the fund calls “wrong-way risk.” Advanced Asian equity markets are the most sensitive to global AI returns, while Europe, the UK, and most emerging markets look better insulated. That insulation is only partial, however, as many have loaded up on US equities since 2022, mainly hyperscalers and other AI names.

Bond yields are climbing on both higher expected rates and fatter term premiums, with the surge in AI-related debt issuance blamed for crowding out government paper. Hedge funds have partly unwound their sovereign bond basis trades without setting off market turmoil, though enough leverage remains for a messy exit. Liquidity is holding up in the US, Europe and the UK, and continues to thin in Japan.

Cyber is the third threat, and AI is on both sides of it. Advanced models can run simulated network attacks, and they are also a key line of defense. In more than 70% of cases in 2026, vendors had almost no time to issue fixes before flaws were exploited, up 20 percentage points on a year earlier. The IMF wants regulators to put the continuity of critical services first, alongside incident reporting and oversight of providers.

Pension funds and insurers are among the financial system’s softer points. Their illiquid holdings have nearly doubled as a share of their portfolios over the past decade, even as the two groups hold over a quarter of corporate bonds in the US and Europe. Private credit is another spot where the fund sees the system thinning, with direct lending growing to nearly USD 2 tn as borrowers take on more debt. Of 10 large business development companies, four, with around USD 90 bn in assets, have lending commitments that run past their liquidity buffers.

Emerging markets are drawing down their foreign exchange reserves, which have fallen most sharply among lower-rated sovereigns. Risk premiums have slid back to low levels, while frontier economies have expanded their access to international markets. The fund sees that mix as a warning sign: Tight risk premiums alongside 10-year US Treasury yields above 4.5% was last seen in 2007. Opaque funding tools such as sovereign total return swaps could also set off margin calls when markets come under stress.

The IMF’s prescription is to build resilience while there’s still room to. It wants limits on margin lending, leveraged ETFs and short-dated options, capital charges on AI-related exposures, credible plans to shrink budget deficits, and wider central clearing of bonds and repos. Regulators should finish putting Basel III in place and keep watch on the ties between banks and non-banks. Emerging markets, meanwhile, need to rebuild their buffers and disclose hidden borrowing.

MARKETS THIS MORNING-

Asian markets were in the red earlier today. Japan’s Nikkei was down 3.9% and South Korea’s Kospi was down around 7%. The performance tracked overnight losses across Wall Street.

THE CLOSING BELL: TADAWUL-

The TASI fell 1.7% yesterday on turnover of SAR 3.9 bn. The index is down 3.4% YTD.

In the green: Watani Iron Steel (+10%), Saudi Enaya Cooperative Ins. (+1.9%), and Sedco Capital REIT Fund (+1.7%).

In the red: Seera Group Holding (-7%), Development Works Food (-6.8%), and SAL Saudi Logistics Services (-6.6%).

THE CLOSING BELL: NOMU-

The NomuC fell 0.9% yesterday on turnover of SAR 19.6 mn. The index is down 6.3% YTD.

In the green: Molan Steel (+13.9%), Saudi Top for Trading (+11.1%), and Almuneef Company for Trade, Industry, Agriculture and Contracting (+9.7%).

In the red: Almujtama Alraida Medical (-18.2%), Alfakhera for Mens Tailoring (-7.7%), and

Lana Medical (-7.2%).