The U.S. bond market has shown sustained strength recently, with notable buying activity flowing into key maturities of the $30 trillion Treasury market. According to Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial, the rally in long-term U.S. Treasurys is partly driven by market concerns that artificial intelligence (AI) could negatively impact the U.S. labor market. Gillum suggested that the recent decline in long-term bond yields reflects, at least to some extent, investor anxiety over the potential "disruptive" effects of AI. In other words, worries surrounding AI are contributing to lower yields in the bond market.
Data showed that on Thursday, the benchmark 10-year U.S. Treasury yield closed below 4.02%, settling at 4.015%, marking its lowest level since November 26 of last year. The 10-year yield is often viewed as a benchmark for pricing 30-year fixed mortgage rates. On the same day, the 30-year Treasury yield fell below 4.7%, ending at 4.665%, its lowest point in the past three months. It is worth noting that this decline in yields has not been accompanied by major economic data releases or other significant events unrelated to AI.
Since January, the downward trend in long-term yields has already influenced the housing finance sector. According to Freddie Mac data, the interest rate for newly issued 30-year fixed mortgages has dropped below 6%, the first time in three and a half years. Typically, U.S. Treasury yields are influenced by multiple factors, including economic growth and inflation expectations, projections for the Federal Reserve's interest rate path, and rising geopolitical risks in regions such as the Middle East. However, the current market environment is somewhat unusual.
On one hand, the overall U.S. economy remains resilient. On the other hand, market expectations for the timing of the Fed's next rate cut have been pushed back to July. Additionally, the U.S. and Iran are engaged in nuclear negotiations in Geneva, with reports suggesting a potential agreement. Against this backdrop, the continued decline in long-term yields appears particularly noteworthy.
Although recent economic data has been mixed and most U.S. companies have not yet initiated large-scale layoffs, the job market has maintained a pattern of "low hiring, low firing." As long as employment remains stable, lower mortgage rates can help alleviate affordability pressures for homebuyers. However, concerns that AI could lead to job displacement continue to simmer beneath the surface.
In a telephone interview, Gillum noted that within the bond market, there is "persistent buying related to AI-induced job replacement," which is closely linked to the yield decline observed over the past few weeks. He indicated that Thursday’s bond market activity "looks like a continuation of this trading logic." Moreover, traders appear to be focusing more on the potential deflationary effects of AI rather than the upside risks to inflation pressure in the coming years.
In contrast to the bond market, investors in the stock market continued to weigh the potential winners and losers of the AI theme on Thursday. The three major U.S. stock indices showed divergent performances: the Dow Jones Industrial Average rose slightly by 0.03%, while the S&P 500 fell 0.54%, and the Nasdaq Composite dropped nearly 1.2%. The pullback in risk appetite has also reinforced the trend of capital flowing into relatively safer assets.
