AI Supercycle to Reshape Global Interest Rates

The AI supercycle is expected to significantly impact global interest rates over the next decade. According to Allianz Trade, the long-term yields in both the US and Europe will decrease due to different reasons and paths. The analysis models five transmission channels: three macro (neutral rate, inflation expectations, fiscal collateral) and two micro (AI-driven duration supply and crowding-out).

In an AI upside scenario, the net effect would be around -50bp for both regions over a 10-year horizon, with roughly +5pp of cumulated US potential growth and +1.6pp for the eurozone. However, in a downside scenario, there will be a prolonged, smaller drag.

The US result depends on AI productivity materializing to keep its fiscal trajectory intact, while Europe's fiscal position doesn't need repairing. The market has already priced the AI productivity story for the US but not the fiscal relief that should come with it.

Fiscal collateral, the extent to which a stronger economy makes a government's debt easier to repay, is what actually decides the outcome in both scenarios and regions. Europe's growth impulse is smaller than the US, but its fiscal position benefits more due to the improvement landing on a stable debt path rather than an expansionary US path.