AI success leads to deflation, AI failure leads to security! Apollo's chief economist: Regardless of the scenario, US Treasury yields will decline in 2027.

AI success leads to deflation, AI failure leads to security! Apollo's chief economist: Regardless of the scenario, US Treasury yields will decline in 2027.

The inflation and fiscal narratives currently dominating the US Treasury market are facing a narrative replacement from AI. Torsten Slok, chief economist at Apollo Global Management, warns that the risk of a sharp decline in long-term interest rates is rising over the next six months—an outcome that is difficult to avoid regardless of whether AI ultimately succeeds or fails.

In his latest report on August 31, Torsten Slok pointed out that AI will be the core narrative driving interest rate trends in 2027. If AI is successfully commercialized, tech companies will generate trillions of dollars in revenue, and the resulting massive deflationary effect will depress long-term interest rates. If the AI bubble bursts, the Nasdaq index could plummet by 50%, and investors will withdraw from the stock market on a large scale and move into US Treasuries for safety, similarly pushing long-term yields down sharply.

The core logic behind this judgment is that financial markets are driven by narratives. The current narrative in the interest rate market revolves around high inflation and fiscal deficits, but as time progresses to around 2027, this narrative will be replaced by the success or failure of AI, and both outcomes point in the same direction—downward interest rates.

AI success: Deflation lowers interest rates; AI failure: Bubble bursts trigger safe-haven flows into US Treasuries.

Torsten Slok points out that the current high level of long-term interest rates is fundamentally due to two major structural pressures: persistent inflation and the deteriorating fiscal situation in the United States . These two forces together support market expectations of persistently high interest rates and dominate the pricing logic of the current bond market.

However, Torsten Slok believes this narrative framework is not permanent. He explicitly states that these forces could be overwhelmed by the trajectory of AI development by early 2027, at which point market attention will fundamentally shift.

In the scenario of AI success , Torsten Slok outlines a clear transmission path: if tech companies generate trillions of dollars in revenue through AI technology, AI will have a massive deflationary effect on the overall economy.

Deflation implies a systemic decline in price pressures, which directly weakens market expectations for long-term inflation, thereby pushing down long-term interest rates. In this scenario, the productivity dividend of AI translates into downward price pressure, fundamentally altering the pricing basis of the interest rate market.

If AI development fails to meet expectations , Torsten Slok predicts the market will face the shock of a bursting bubble. He specifically points out that the Nasdaq index could fall by 50% in this scenario, with investors withdrawing en masse from the stock market and flocking to US Treasury bonds for safe haven.

Large-scale capital rotation will directly push up US Treasury prices and lower yields, leading to a "sharp decline" in long-term interest rates. This logic is highly consistent with the safe-haven nature of US Treasuries during numerous historical sell-offs of risky assets—stock market crashes have ironically become powerful catalysts for the bond market.

Six-month window: The market will make a judgment.

Torsten Slok emphasized that the next six months are a crucial observation window . During this period, the market will gradually form its judgment on the development path of AI—whether it will successfully realize commercial value or the bubble will begin to burst.

He pointed out that financial markets are inherently narrative-driven. The current interest rate narrative focuses on inflation and fiscal issues, but by 2027, the dominant narrative will shift to the success or failure of AI. Regardless of which narrative ultimately prevails, its impact on long-term interest rates will be consistent: downward .

This means that for bond investors, the current high-interest-rate environment may be on the eve of a narrative shift, and the logic of positioning for long-term US Treasuries in advance is quietly accumulating.

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