A tenth of a percentage point of extra productivity growth — well within the range of plausible near-term AI effects — raises the fundamental value of U.S. government debt by $1.3 trillion. If markets fully priced this in, nominal Treasury yields would fall by about 70 basis points.
Half a percentage point of extra growth would raise the value of the debt by $6.5 trillion. For context: under the CBO baseline, the debt-to-GDP ratio rises from 100% today to 172% by 2055. Under the +0.5pp scenario, it stabilizes near 124%. Debt-to-GDP stops exploding. That is an enormous change in the fiscal outlook, and it comes from a rate of growth only modestly above the post-2000 average…
There is a second, subtler point. Because revenue scales as GDP^1.07, the fundamental value of the debt is a convex function of productivity growth. A +1pp growth shock raises value by 108%; a −1pp shock only lowers it by 87%.
That asymmetry means bondholders gain from uncertainty, not just from higher expected growth. If markets become more uncertain about AI’s long-run productivity impact, and that uncertainty is mean-preserving, Treasury valuations should still rise. Holding expected growth fixed, ±0.5pp of growth uncertainty is worth about $0.7 trillion in convexity value. Treasuries embed a long call option on AI, and the option is valuable even when the strike is out of the money.
Here is more from Hanno Lustig, with Howard Kung and James Paron. Here is the full paper. These are of course very important results, kudos to the authors. Via the excellent Samir Varma.