How are bond markets responding to the unstoppable advances in artificial intelligence? Economists at the Massachusetts Institute of Technology (MIT) admit that their response has been very surprising.
Between 2023 and 2025, bonds responded on average to every new development in the artificial intelligence (AI) sector—such as a new version of this or that chatbot—with a rise in price and a fall in yield. And it didn't matter whether they were long-term government, inflation-protected, or corporate bonds. This reaction was not temporary, but rather more permanent.
Economists at MIT are surprised because, as they say, the general narrative is that artificial intelligence will bring significant across-the-board economic growth. This should correspond more to the growth in long-term bond yields.
At the same time, the reaction of the bond markets does not suggest that AI will completely transform the economy in such a way that, for the first time in history, it will practically overcome the age-old problem (theory) of scarcity [its basic idea is that human needs are unlimited, but the resources to satisfy them are limited, ed.]. Elon Musk, for example, also says that AI will end the problem of scarcity.
In short, bond markets do not believe that AI will cause extreme, widespread disinflationary and deflationary pressures.
What the new Fed chief has in mind
However, Kevin Warsh, the likely head of the US central bank, is betting on strong disinflation caused by AI. He believes that the increase in productivity caused by artificial intelligence will be so significant that it will lead to a noticeable reduction in inflationary pressures, allowing the central bank to lower its base interest rates, as US President Donald Trump desires.
However, what the bond markets are suggesting is that AI will deepen inequality, the consequences of which will dampen economic growth. In certain parts of the economy, productivity will increase significantly, perhaps unprecedentedly, leading to above-average profitability, primarily for leaders in the artificial intelligence sector, such as Amazon, Alphabet, Meta, and, to some extent, Microsoft. From this perspective, the current massive investments by these companies in AI infrastructure and data centers may make good sense.
However, artificial intelligence will have a negative impact on the rest of the economy, at least it seems so. For example, there is a risk of related large-scale layoffs and rising unemployment. This will limit the consumption possibilities of a significant part of the population to such an extent that it will significantly slow down overall economic growth. This will create pressure in the form of so-called bad disinflation, or even bad deflation, which is not caused by technological advances, productivity growth, and the associated reduction in unit production costs, but by a more widespread slump in demand.
Two pressures will thus counteract the pro-inflationary pressure of stronger economic growth, which will cause an increase in profitability enabled by AI. These are the pressure of bad disinflation, or even deflation, and the pressure of good disinflation, or even deflation, caused by the aforementioned reduction in unit production costs. However, the former pressures should be stronger.
The call for redistribution
Part of the economy will benefit immensely from AI, while another part will be significantly damaged by it. Those who are damaged will likely call for a more massive redistribution from the "AI winners to the AI losers," which will likely find political support. At the same time, this will also intensify calls for the widespread introduction of measures such as universal (unconditional) basic income.
The part of the economy that artificial intelligence defeats will weaken growth to such an extent that bond markets are already not responding to shifts in AI as we would expect if artificial intelligence were to trigger clear, significant, widespread economic growth.
At the same time, the reaction of bond markets suggests that the economic growth and productivity gains caused by AI will not be strong enough overall to solve the problem of demographic aging.
Artificial intelligence may be a major breakthrough in the eyes of bond markets, but not one that could "feed" the suddenly emerging army of unemployed and, moreover, the growing population of retirement age. This fact will weaken overall consumption in the economy to such an extent that the aforementioned pressure of bad disinflation, or deflation caused by insufficient demand, will have a significant dampening effect.
Moreover, the larger the unemployed segment of the population, the stronger the natural pressure for massive redistribution from the "winners to the losers" in the AI sector. The unemployed segment of the population may become larger the longer the current form of immigration continues.
That is why, for example, at this year's economic forum in Davos, people like Larry Fink, head of BlackRock, and Alex Karp, head of Palantir, basically argued that countries that have not allowed mass immigration are better prepared for artificial intelligence.
Fink and Karp are undoubtedly among the "AI winners." They already realize that current mass immigration will mean even stronger future pressure to share their profits from artificial intelligence with its losers. That is why they chose relatively anti-immigration rhetoric in Davos, which would certainly not have been heard there a few years ago.
This text, which has been shortened, was originally published on the website lukaskovanda.cz.