Artificial intelligence (AI) has, among other forces, almost certainly driven mortgage rates higher this year. And its baneful role may continue into 2027 and beyond.
It's not that AI itself is affecting mortgage rates. No, it's all the money that's being borrowed from bond markets to fund its development, including countless data centers, mountains of silicon chips, numerous power plants, and similar investments.
The Link Between AI Bonds and Mortgage Rates
On Friday, Barron's totaled up its estimates of likely AI spending during 2026-29 by the seven biggest spenders, based on FactSet data. And its total was $4.4 trillion.
Investors have finite funds for investing in bonds. And suddenly, mortgage bonds (aka mortgage-backed securities or MBSs) are competing with both AI (among other corporate bonds) and rocketing federal government deficits (U.S. Treasury bonds).
So, the bond market is swamped with bonds. And one doesn't need a Nobel Prize in economics to know that a glut of a product with roughly constant demand leads to lower prices.
With bonds, the only way to lower prices is to increase the yields investors get. And that inevitably means higher mortgage rates because those are largely determined by the yields on MBSs.
Could AI Push Mortgage Rates Higher for Only Six Months?
"This capital expansion [of AI] is expected to continue at least for the next few years," wrote the Texas Real Estate Research Center at Texas A&M University last week. "Recent estimates indicate that global A.I.-related capital expenditures could reach $7.6 trillion between 2026 and 2031.
"An expansion of that magnitude draws from the same pool of resources that funds other investments, including mortgages. To that extent, the A.I. buildout could continue placing upward pressure on interest rates in the coming years."
Dr. Torsten Sløk, chief economist at Apollo, took a very different view last Friday. He believes AI will cease to drive bond yields higher within six months.
"If AI succeeds and tech companies generate trillions in revenue, AI will be massively deflationary and push rates lower," Sløk wrote. "If AI does not work out, the bubble bursts and the Nasdaq is down 50% as investors rotate out of equities into Treasuries and long rates fall dramatically."
Well, that would be nice. But, needless to say, some economists disagree with Sløk's analysis.
Or Could It Affect Rates Longer?
The day after Sløk published, Brad DeLong, emeritus professor of economic history, finance, and macroeconomics at UC Berkeley, wrote on his Substack, "What is very noteworthy is the claim that all of this is likely to come to a head in the next six months, and that the narratives surrounding it are overwhelming what Torsten Slok sees as the 'inflation [risk] and [deficit] fiscal problems' that are the narratives currently dominating the financial market."
"There is one enormous puzzle here: Why does Torsten Slok think that the AI question will be resolved in the next six months?" DeLong continued. "I do not see the reason for thinking that at all."
Last Friday, Barron's was similarly skeptical, saying that from the railroad buildout, through the dot-com boom, and beyond, American investments in transformational technologies had consistently held up until they reached about 25% of total economic output. Only then came the reckoning.
"Artificial intelligence isn’t there yet, and won’t be for years, suggesting that the AI trade — and the stock market rally — has more room to run," concluded Barron's. So, we might see upward pressure on mortgage rates "for years."
Economists clearly disagree over how long AI could keep upward pressure on rates. We’re generally admirers of Sløk’s analysis, but in this case, we found DeLong’s skepticism about the six-month timeline more convincing.
It's Not Just AI
As DeLong suggested, Sløk thinks AI has to be seen in the context of inflation and fiscal problems. And that makes sense.
But, unfortunately, neither of them is currently conducive to lower mortgage rates. Last week's personal consumption expenditures (PCE) price index showed inflation running at 3.7% year over year in July. And that was the second of two months when gas and diesel prices fell, on hopes for a swift reopening of the Strait of Hormuz.
Those prices rose again in August, and most expect to see higher inflation rates in the coming months. That can only put additional upward pressure on mortgage rates.
Bond investors receive a fixed income (a set percentage of their investment) each year, so are highly vulnerable to inflation eating into the value of their revenues. If they believe inflation is heading higher, they'll demand higher yields to compensate them — or put their money elsewhere.
Mortgage Rates Besieged on All Sides
Fiscal problems are at least as worrying. On Aug. 19, the national debt broke through the $40 trillion level for the first time. And there's no sign that debt or the national deficit will improve anytime soon.
"Deficits are large by historical standards," says the Congressional Budget Office (CBO). "The deficit totals $1.9 trillion in fiscal year 2026 and grows to $3.1 trillion in 2036. Relative to the size of the economy, the deficit is 5.8 percent of gross domestic product (GDP) in 2026 and increases to 6.7 percent in 2036. Deficits averaged 3.8 percent of GDP over the last 50 years.
"Debt held by the public rises from 101 percent of GDP in 2026 to 120 percent in 2036, well above the previous record of 106 percent just after World War II," continues the CBO.
Meanwhile, "As a World Economic Forum report, Deepening Divides: The Cost of a More Fragmented Financial System, noted recently, 'US Treasury securities are a cornerstone of the global financial system,' adding that they are typically 'nearly as liquid as cash and serve as a safe haven asset that investors and central banks historically turn to during volatile periods,'" wrote the World Economic Forum (WEF) on Aug. 20.
"Today, however, the global economy is facing major transformations and numerous headwinds that have shaken investor confidence in government bonds," continued the WEF.
So, mortgage rates are besieged on all sides. We can envisage them falling back if there's a permanent resolution of the Iran conflict alongside a full reopening of the Strait of Hormuz. That would likely relieve the inflation risk.
But we doubt such a fall would be more than moderate because of the government's and AI's huge appetite for debt. As long as mortgage bonds have to compete for funds with those two, it's hard to see mortgage rates tumbling far into the 5% range (for a 30-year fixed-rate loan) in the foreseeable future.
