New Delhi [India], October 30 (ANI): Global financial markets could witness increased volatility heading into 2027 amid rising bond yields and concerns over excessive investments in artificial intelligence (AI), even as US government bond yields are expected to stabilise, according to a report by Fitch Ratings.

The report highlighted growing warning signs in global financial markets, with rising bond yields reflecting higher inflation-adjusted interest rates, while equity market trends in recent months have raised concerns over excessive capital expenditure on artificial intelligence (AI).

It further noted that the US Federal Reserve has shifted towards a more hawkish monetary policy stance under its new chair, as reflected in its unanimous decision to raise interest rates in September for the first time in three years.

Fitch has revised its US policy rate forecast to 4.25 per cent through 2027, factoring in one additional rate hike before the end of 2026.

"Our base case is for yields to stabilize, with the US 10-year yield falling back to 4.8% by end-2027, but there are risks to the upside," it said.

The 10-year US Treasury yield hovered below 5 per cent on Thursday following the latest inflation data and a strong reading on economic growth. It was at 4.927 around per cent, down 0.062 percentage points, or 6.2 points, at the time of reporting.

However, Fitch cautioned that prolonged disruptions to oil supplies through the Strait of Hormuz beyond the first quarter of 2027 could push crude oil prices above its baseline expectations, adding further pressure on bond yields.

"Other factors could also drive yields above our base-case expectations," it said, adding, "The compression of spreads over Japanese assets is likely contributing to a flattening in net foreign purchases of US treasuries."

Additionally, the unwinding of the Federal Reserve's balance sheet and a rapid increase in bond issuance by AI-focused hyperscalers could intensify competition for investor funds, putting further pressure on Treasury demand as per the ratings agency.

Fitch warned that rapid growth in capital expenditure would remain a major credit risk heading into 2027. It noted, improving capabilities of open-weight AI models relative to frontier models, alongside expanding investment plans, have raised concerns that companies may be overestimating sustainable levels of AI spending.

"A material reassessment of long-term AI monetisation prospects could result in a sharp reduction in capex, with implications for issuers across the AI value chain and wider capital markets," it added. (ANI)