AI Shortfalls Could Send Bond Yields Soaring, Economist Warns

On June 12, 2025, Joseph Davis, global chief economist at Vanguard, issued a striking forecast that has left economists and investors reevaluating the future landscape of finance. In his newly published book Coming Into View, Davis presents a compelling thesis grounded in 130 years of macroeconomic data: the next five to seven years could bring profound shifts in U.S. growth, inflation, and interest rates—driven in large part by the uncertain promise of artificial intelligence.

Davis's core argument revolves around productivity. If AI lives up to its hype, it could become the salve for America’s swelling structural deficits, offsetting inflationary pressures and fostering sustainable economic growth. But if it falters—if AI adoption fails to meaningfully boost productivity—the consequences could be severe. In such a case, Davis projects that 10-year Treasury yields could climb to 9%, with sustained averages hovering around 7%, levels unseen since the early 1980s.

These predictions stem from more than conjecture. Davis’s economic model dissects the primary drivers of inflation and interest rates, and finds that structural deficits, not demographics, are the looming threat. That puts immense pressure on AI to deliver measurable gains. The hope is that AI will reduce inefficiencies, streamline labor-intensive sectors, and unleash a new wave of innovation. But as with any transformative technology, the payoff may be slower or more uneven than ideal.

Investors, Davis warns, should not bank solely on historical patterns. In a world where fiscal imbalances balloon and productivity stagnates, the risk landscape changes. He advocates for a strategic shift: away from passive portfolios relying on historical norms, and toward active risk management capable of responding to volatility. In this climate, value stocks may rise while former tech darlings stumble—especially if expectations surrounding AI outpace reality.

Davis’s call is not a doomsday projection. It is a sober look at the growing dependency the financial system is placing on artificial intelligence and the cascading effects of its success—or failure. For policymakers and investors alike, the message is clear. Now is the time to plan for uncertainty and rethink assumptions about the economic tailwinds AI alone is expected to provide.