Stock market "honey," bond market "arsenic"? Countries' military and AI spending soar, pushing global debt to a record $348 trillion

Military and AI are pushing fiscal expansion to the forefront, and markets are beginning to reprice “growth” and “supply shocks.”

On February 25, the Institute of International Finance (IIF) latest data showed that global debt increased by $28.8 trillion to $348 trillion last year, reaching a record high and marking the largest increase since the COVID-19 pandemic.

The IIF pointed out that the driving factors are not corporations or households, but rather governments increasing investments in national security and related areas, with AI and other technological investments also contributing. Debt as a percentage of GDP has declined for the fifth consecutive year to about 308%, but the IIF emphasized that this decline “comes entirely from lighter burdens on the private sector,” while government debt share remains on the rise.

For the stock market, fiscal expansion is more like “honey”: military orders and AI capital expenditures tend to reinforce growth and profit expectations, but for the bond market, it’s closer to “poison”—larger government bond issuance and refinancing needs push up term premiums.

TwentyFour Asset Management fund manager Gordon Shannon bluntly said, “Everyone is focusing on corporate bond issuance for AI financing, but the real driver of supply is the government.”

Supply pressures are already reflected in interest rates. The Financial Times reports that sovereign bond issuance remains high, combined with multiple central banks tightening post-pandemic bond purchases, leading to higher borrowing costs: the 10-year yields in the US and UK hover around 4%, and Germany, the “safest benchmark in the Eurozone,” has risen from negative yields a few years ago to over 2%. Long-term rates are rising faster than short-term rates, making the yield curve steeper, which means bond duration risk is harder to avoid.

The IIF warns that military-driven fiscal expansion, combined with lower interest rates and looser financial regulation, could further increase debt levels.

The organization estimates that Europe’s debt-to-GDP ratio could rise by more than 18 percentage points by 2035 due to geopolitical tensions and increased defense spending after U.S. President Trump’s return to the White House. Trump also demanded NATO European members increase military spending to 5% of GDP and pledged that U.S. defense spending would rise by about $500 billion to $1.5 trillion by 2027.

The IIF also highlighted that governments in major emerging economies like Brazil, Mexico, and Russia are under increasing debt pressure.

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