Stock Market "Honey," Bond Market "Arsenic"? Soaring Military and AI Spending Worldwide Pushes Global Debt to a Record $348 Trillion

Military industry and AI are putting fiscal expansion in the spotlight, as the market begins to reprice "growth" and "supply shocks".

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

The IIF pointed out that the driving force was not companies or households, but governments ramping up national security and related investments, with technology investments like AI further fueling the trend. The debt-to-GDP ratio fell for the fifth consecutive year to about 308%, but the IIF emphasized this decrease "entirely comes from lighter burdens on the private sector" while the proportion of government debt continues to rise.

For the stock market, fiscal expansion acts more like "honey": military orders and AI capital expenditures easily strengthen expectations for growth and profits, but for the bond market it's closer to "poison"—higher issuance and refinancing of government debt lift the term premium.

TwentyFour Asset Management fund manager Gordon Shannon bluntly stated: "Everyone is watching corporate bond issuance for AI financing, but the real driver of supply is the government."

Supply pressures have already appeared in interest rates. The Financial Times reported that sovereign debt issuance is at high levels, combined with several central banks shrinking bond purchases after the pandemic, pushing up borrowing costs: U.S. and U.K. 10-year yields hover around 4%, and Germany—the "safest benchmark in the eurozone"—has risen from negative yields several years ago to over 2%. Long-term interest rates are rising faster than short-term rates, the yield curve is steeper, which means duration risk for bonds is harder to "hide from".

The International Institute of Finance warns that fiscally expansion driven by military spending, combined with lower interest rates and looser financial regulation, could further increase debt.

The institute estimates that Europe, facing geopolitical tensions and ramping up defense after the return of U.S. President Trump to the White House, may see its debt/GDP rise more than 18 percentage points by 2035. Trump has also demanded that NATO European members raise military spending to 5% of GDP, promising to increase U.S. defense spending by about $500 billion to $1.5 trillion by 2027.

The Institute also singled out Brazil, Mexico, Russia and other major emerging economies for rising government debt pressure.

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