BIS warns of rising debt, AI bubble risks and inflation threats

At its annual meeting in Basel on Sunday, the Bank for International Settlements warned that record public debt, fragile bond markets and an AI-driven investment surge are converging into a new risk cluster for the world economy. For the United States, that combination points to higher borrowing costs, shakier retirement portfolios and a narrower cushion if growth slows.

The BIS Annual Economic Report 2026 calls the outlook “progress and peril.” The global economy got through 2025 partly because effective tariffs came in lower than feared, firms adjusted to higher trade barriers and confidence was lifted by artificial intelligence. High public debt and the growing role of non-bank lenders now make sovereign bond markets more vulnerable to abrupt repricing and dysfunction.

Pablo Hernández de Cos, the BIS general manager, warned that policy actions need to reinforce each other so fiscal and monetary authorities do not pull in opposite directions. Higher Treasury-market stress would feed through to mortgage rates, corporate debt and federal financing costs. More frequent supply disruptions could entrench higher inflation expectations among households and businesses, making price pressures harder to contain. De Cos called the recent U.S.-Iran ceasefire and reopening of the Strait of Hormuz “good news” for oil markets, though normalization would take time.

A separate BIS bulletin published on January 7, 2026, says AI investment is surging and will likely shift from financing out of operating cash flow toward debt, with private credit playing a rapidly increasing role. It also says the boom’s sustainability depends on AI firms meeting high earnings expectations. The Bank of England’s December 2025 Financial Stability Report said U.S. equity valuations, especially for AI-related companies, were close to the most stretched since the dot-com bubble and that AI infrastructure spending over the next five years could exceed five trillion dollars.