- The AI supercycle will pull long-term yields down in both the US and Europe, but for very different reasons and by very different paths. We model this across five transmission channels – three macro (neutral rate, inflation expectations, fiscal collateral) and two micro (AI-driven duration supply and crowding-out) – applied to an AI upside and downside scenario. Over a 10-year horizon the net effect is around −50bp for both regions in the upside scenario (roughly +5pp of cumulated US potential growth, +1.6pp for the eurozone), and a prolonged, smaller drag in the downside (−2.5pp and −1.3pp respectively). The US result depends on AI productivity actually materializing to keep its fiscal trajectory intact; the eurozone gets to the same place even without the AI dividend, since its fiscal position doesn't need repairing in the first place. The US is the levered, volatile expression of the AI trade; Europe is the safer one.
- The market has already priced the AI productivity story for the US, but not the fiscal relief that should come with it. The USD 5y1y forward has moved from ~3.0% to 4.9% since mid-2025 some 150bp above our median neutral-rate estimate and 90bp above the top of our estimate range, and more than the full +67bp our model assigns to the Ai enhanced neutral-rate range over the next decade. What isn't priced at all is the fiscal collateral improvement, worth −85bp to the US 10Y by the end of the horizon. Either the market doesn't believe AI will repair the fiscal trajectory, or it's pricing a less favorable version of the same story with higher AI-driven job displacement pushing up social protection and unemployment spending enough to offset the tax-revenue gain.
- 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 both regions. The transatlantic rates converging seems counterintuitive at first view as Europe's growth impulse is a third the size of the US. But its fiscal position benefits more, because the improvement lands on a stable debt path rather than the expansionary US path. For every point of growth AI delivers, Europe's fiscal position improves about 1.6 times more than that of the US.