A lot of the recent uptick in mortgage rates has been attributed to the ongoing war with Iran.
But there is perhaps another, lesser known reason mortgage rates have pushed back into the high 6s.
And it’s all the artificial intelligence (AI) spending, which has arguably crowded out other investments, leading to higher bond yields.
When this happens, it increases the supply of bonds that compete with Treasuries and mortgage securities for investor capital.
And that can put even more upward pressure on rates. But perhaps over the long run it’ll do the opposite.
How AI Is Making Your Mortgage Rate Higher
- AI companies need lots of money right now for their build out
- They borrow funds by issuing corporate bonds
- Buyers of these bonds only have so much money to invest
- And also invest in Treasuries and mortgage-backed securities (MBS)
- High bond supply is forcing these companies to offer higher yields
- That means MBS have to offer higher yields as well to attract investors
- And that can lead to higher interest rates on home loans too
As laid out above, AI spending is off the charts lately.
And in order to fund all the spending, these companies are issuing bonds.
So-called “hyperscalers” like Alphabet, Amazon, Meta, Microsoft, Oracle have been spending hundreds of billions each year to build out data enters and related infrastructure.
And a lot of these costs are being financed by large investment-grade corporate bond sales.
To put it in context, U.S. hyperscaler bond issuance has risen “from 2% of total USD investment-grade issuance between 2022 and 2024 to an expected 9% in 2026,” per J.P. Morgan Asset Management.
And just this year, hyperscalers have issued a whopping $219 billion in “investment-grade bonds” to fund these massive projects.
When it comes down to it, there’s only so much capital available, and if a ton of it is being allocated to build data centers, there’s less available for things like mortgage lending.
This means when someone does want to apply for a home loan, the rate will be higher, all else equal.
You’re essentially competing for those borrowing dollars with AI companies, which drives up the rate of interest.
The same investors who are buying these AI-backed bonds also buy things like Treasuries and mortgage-backed securities (MBS).
To attract these investors, they have to increase the yield (interest rate) to remain competitive.
Otherwise these investors, whether they’re banks, insurance companies, or pension funds, will just invest in those tech bonds instead.
How much is another question. Maybe it’s only .125% higher.
So if the 30-year fixed is 6.75% today, perhaps it’d be a slightly less unattractive 6.625%.
But there’s an argument it could be even larger, perhaps 0.25% or more.
And ultimately any increase in rates is impactful given how poor housing affordability is at the moment.
It’s yet another reason why interest rates remain elevated and the old “higher for longer” adage remains in play.
Eventually AI Could Push Mortgage Rates Lower
While massive AI investment might be piling upward pressure on interest rates now, the opposite could play out later.
It’s one of the arguments new Fed chair Kevin Warsh made a while back, saying productivity gains could prove to be disinflationary and allow the Fed to cut rates instead of raise them.
Of course, a lot of people are skeptical at the moment, but only time will tell how it actually plays out.
If the theory proves to be true, bond yields and mortgage rates could drift lower over time.
In addition, AI-driven processes could simply make mortgages cheaper to produce, eliminating a lot of costs with the savings passed on to consumers.
However, that might take years to play out and isn’t very practical to a prospective home buyer today.
Nor an existing homeowner with a 7% mortgage rate looking to get some relief with a rate and term refinance.
So while AI might eventually lead to lower mortgage rates, the build out could be exacerbating things at the moment.
(photo: Robert Scoble)
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