How AI Could Narrow the Spread Between Treasury Yields and Mortgage Rates

Wall Street analysts are expressing bullish views on lower long-term interest rates as artificial intelligence (AI) begins to reshape the economics of lending.

According to analysis by Jim Iuorio for Seeking Alpha, the productivity boom associated with AI could narrow the spread between the 10-year yield and the 30-year fixed mortgage rate, even in a scenario where Treasury yields remain stable.

The central thesis of this shift is that a productivity revolution driven by AI may trigger deflation. This deflationary pressure is identified as a factor that could significantly impact interest rates moving forward.

This outlook follows a period of rapid AI integration across multiple economic sectors. The adoption of generative AI was exemplified by the release of ChatGPT, which Iuorio notes reached 100 million users in two months, making it the fastest-growing consumer application in history at that time.

While the technology is expected to raise standards of living and benefit society in the long term, the transition is presenting immediate economic frictions. There is a growing perception that AI is stifling traditional job growth, as companies slow their hiring processes in anticipation of reducing their overall need for employees.

These developments are occurring against a backdrop of prolonged stress in the housing market. The market has faced significant challenges for five years, beginning in 2021 when the Federal Reserve started raising interest rates to combat high inflation.

The shift in lending economics suggests that AI’s influence may extend beyond simple operational efficiency, potentially altering the fundamental relationship between government bond yields and consumer mortgage pricing.