Structural changes in the global bond market pose potential risks

Ask AI · How will the transformation of investor composition reshape the future market liquidity landscape?

Recently, the Organisation for Economic Co-operation and Development (OECD) released the “Global Debt Report 2026,” stating that in 2025 the global debt market underwent structural changes accompanied by potential risks. Policy makers and market participants need to remain vigilant and take appropriate measures to maintain the market’s long-term resilience and stability.

The report points out that in 2025, both the global sovereign bond and corporate bond markets reached historical highs. Sovereign bond outstanding stood at $61 trillion, driven mainly by high funding demand and low long-term interest rates, with the scale growing significantly compared with the previous few years. Corporate bond outstanding was $36.4 trillion. The report forecasts that in 2026, governments and companies will borrow $29 trillion, up 17% from 2024, reflecting the continued growth momentum of the global debt market and the strong demand for financing from both governments and businesses.

Data show that the investor composition in the global bond market is undergoing significant changes. Central banks were once the primary buyers in the bond market, purchasing large volumes of bonds under quantitative easing policies to support the economy. However, with the implementation of quantitative tightening, central banks have gradually reduced bond purchases and begun selling portions of their holdings, leading to a decline in their share in the bond market. Currently, central banks’ role in the bond market is gradually shifting from direct buyers to more indirect influencers. At the same time, the share of foreign investors in the global bond market has increased markedly. Particularly in the United States and the euro area, they are becoming important market participants, exerting a major impact on market liquidity and price discovery.

The report notes that changes in the overall market size and investor composition bring new risks and challenges. On interest-rate risk, as long-term interest rates rise, governments and companies’ borrowing costs increase. In particular, for issuers that need to refinance large amounts of maturing debt, rising rates will impose a heavy financial burden. In a high-interest-rate environment, debt sustainability faces important challenges. Governments and enterprises need to ensure their debt levels remain within a controllable range to avoid default risks. On liquidity risk, although overall market liquidity has improved, changes in investor composition may make the market more prone to liquidity shortages during periods of stress. Especially when leveraged investors such as hedge funds withdraw from the market in a concentrated manner, liquidity risk will increase significantly. As the roles of non-bank financial institutions and hedge funds expand in the market, counterparty risk also rises accordingly. These institutions’ financial conditions and risk management capabilities vary, increasing uncertainty in the market. On investor behavior risk, changes in the behavior of major investors—such as hedge funds and foreign investors—may have a significant impact on the market. When these investors withdraw from the market at the same time, it will trigger increased market volatility and could even lead to a market crash.

The report states that, given the current development dynamics and potential risks of the global debt market, targeted measures are needed to enhance its resilience and stability. First, it is necessary to encourage participation by different types of investors in the bond market. Through policy guidance and market innovation, attract a diversified investor group, including pension funds, insurance companies, mutual funds, and retail investors, to enhance the market’s depth and breadth.

Second, it is necessary to strengthen market transparency. In particular, require leveraged investors such as hedge funds to regularly disclose their holdings, leverage levels, and trading strategies, so that regulators and market participants can better assess market risks and liquidity conditions.

Third, it is necessary to strengthen the regulatory framework by intensifying oversight of systemically important financial institutions. Impose stricter capital and liquidity regulatory requirements on systemically important financial institutions such as banks and insurance companies, conduct stress tests on a regular basis, and ensure they can maintain sound operations under extreme market conditions.

Fourth, it is necessary to optimize the debt structure. By issuing more long-term bonds and adjusting the debt maturity profile, reduce reliance on short-term financing, increase the proportion of long-term debt, and reduce refinancing pressure and interest-rate risk caused by short-term debt maturities.

Fifth, it is necessary to improve risk management capabilities. Establish a comprehensive risk management system, use advanced risk management tools and technologies to monitor and provide early warnings for all kinds of risks in real time, and ensure that risks can be addressed quickly when risk events occur.

Sixth, it is necessary to strengthen international cooperation. Through international organizations and multilateral mechanisms, enhance coordination and cooperation among countries in debt management, regulatory policies, and market transparency, and jointly maintain the stability and healthy development of the global debt market.

Finally, it is necessary to support sustainable development financing. Provide policy support and market incentives for sustainable financial instruments such as green bonds, encourage more capital to flow into areas such as environmental protection and low-carbon initiatives, and promote the sustainable development of the economy and society. (Economic Daily reporter Liang Tong)