From our perspective, the “higher-for-longer” rate thesis has become one of the market’s most widely accepted assumptions, influencing valuations, capital allocation and investor expectations across asset classes.
While today’s elevated-rate environment reflects real pressure on capital markets, we believe those pressures are largely cyclical. Over the longer term, structural forces—particularly demographic aging and AI-driven productivity gains—point to a different destination than markets may currently be pricing in: a gradual, uneven move toward lower rates.
The Structural Tailwind: Demographics and Productivity
To understand where rates may go next, we maintain that it is important to look beyond near-term headlines and focus on forces that shape economies over decades.
Demographics are one of those forces. Japan has provided a three-decade case study in what happens when a developed economy ages and population growth slows. Despite high public debt and monetary stimulus, Japan spent much of that period battling disinflation rather than persistent inflation. Europe is increasingly following a similar path, with slower population growth and inflation that has often faded once temporary shocks subside.
As populations age, household formation slows, demand for housing, durable goods and credit moderates, and savings often rise. The result tends to be less structural demand growth and more capital seeking investment opportunities—conditions that typically weigh on inflation and long-term rates.
Now add artificial intelligence to the equation.
AI is designed to help businesses produce more output without a proportional increase in labor. Early applications across software development, customer service, logistics, healthcare research and back-office operations suggest meaningful productivity gains are beginning to emerge.
When companies can produce more with the same resources, unit costs decline. Productivity growth expands supply faster than costs rise, making it one of the economy’s disinflationary forces.
Theoretical AI Gains1
The Cyclical Reality: Why Rates Remain Elevated Today
If those long-term forces are so compelling, why are rates still high? One likely answer is immediate competition for capital. We believe several major investment cycles are unfolding at once.
1. AI infrastructure requires upfront spending on data centers, power generation, transmission networks, chips, and cooling systems. The capital is deployed today, while the productivity benefits may take years to fully materialize.
U.S. Construction Spending2
2. At the same time, governments are running fiscal deficits. Increased debt issuances must be absorbed by investors, creating additional demand for capital and placing upward pressure on rates.
U.S. Treasury Offering3
3. Reshoring and reindustrialization are also accelerating investment in domestic manufacturing, supply-chain resilience, energy independence, and defense capabilities. Because many of these projects are driven by strategic priorities, they may be less sensitive to near-term financing costs.
Overlay geopolitical uncertainty, trade disputes and periodic supply disruptions, and it is easy to see why inflation concerns continue to resurface. But there is a critical distinction between temporary pressure and structural trends.
Tariffs, supply shocks, and capital spending waves can all create volatility. Yet once new capacity is built, the spending fades while the additional supply remains. Historically, that transition is often disinflationary.
Market narratives rarely shift all at once. More often, they change gradually as data continues to challenge consensus expectations.
The indicators we think are worth watching are those that show whether productivity gains are flowing through the broader economy: unit labor costs, output per hour worked, and the relationship between GDP growth and employment growth.
If AI is enhancing productivity at scale, economic output should grow faster than labor demand. That is the combination likely to convince bond markets that inflation pressures are easing.
On the capital-demand side, investors should watch whether today’s spending wave begins to moderate as AI infrastructure matures, and new capacity comes online. Fiscal policy remains a wildcard. Persistent deficit expansion could keep rates elevated longer than structural disinflationary forces alone would suggest.
If this framework proves correct, today’s rate environment may eventually look less like a permanent regime shift and more like a cyclical phase within a longer-term trend.
Many assets are currently valued as though higher rates will persist indefinitely. Yet if demographics and productivity ultimately reassert themselves, long-duration assets, rate-sensitive real estate and businesses whose valuations were compressed during the recent rate reset may be better positioned than current pricing implies.
In our opinion, the path will not be smooth. Geopolitical events may continue to spark inflation concerns. Treasury issuance may create volatility. Markets can repeatedly find reasons to revisit the higher-for-longer narrative.
But long-term structural forces tend to matter more than short-term headlines. Demographics are difficult to reverse, and productivity gains rarely disappear once achieved.
While the journey may be uneven, we believe both forces point toward the same conclusion: the long-run direction of rates is likely lower, not higher.