Global funds seek refuge in Australian bonds as AI boom wobbles


Inflows into Australian bond funds tracked by Morningstar Inc topped A$4bil last year, the most in four years. — Bloomberg

MELBOURNE: Investors are piling into Australian bonds as one of the world’s safest and highest-yielding sovereign debt markets offers shelter to those fleeing an artificial intelligence (AI) scare trade.

Inflows into Australian bond funds tracked by Morningstar Inc topped A$4bil last year, the most in four years. At 4.72%, the nation’s 10-year benchmark offers the highest yields among developed markets.

What makes Australia appealing is that, unlike the United States and parts of Asia, its banking and resource-heavy market is among the least exposed to bets on AI.

At the same time, the Reserve Bank of Australia (RBA) has emerged as the first major central bank to raise interest rates in 2026, with traders pricing in at least one more hike to contain inflation.

Among those buying Australian bonds is Nick Ferres, chief investment officer at Vantage Point Asset Management, which oversees about US$2bil. He’s slashed stock exposure in his macro fund and shifted some of that cash into short-dated Australian government debt, which now makes up almost a third of the portfolio.

“I’m probably the most defensive I’ve ever been,” Singapore-based Ferres said.

Describing the AI spending by megacap firms such as Alphabet Inc and Amazon.com Inc as the “most epic misallocations of capital in history,” Ferres said any pullback there could spur a sharp sell-off across Asia. Australian government bonds – particularly at the short end of the yield curve – offer a new haven, he added.

Several factors are drawing investors at once. The RBA’s tightening cycle has pushed Australia’s 10-year yield up 60 basis points since mid-October, widening its premium over US Treasuries to the largest in over three years.

Australian yields have also been moving more in line with Treasuries, suggesting investors see the country’s bonds as a viable way to diversify their US exposure. Their 60-day correlation rose to the highest level in almost a year last month.

Even a small diversification away from the United States can have an outsized impact on other markets, and that’s a key driver of the demand for Australian fixed income at the moment, said Brett Solomons, a portfolio manager at QIC Ltd, which manages A$135bil.

QIC’s fixed-income unit drew A$5.9bil in net inflows in the 12 months through January, reaching a record A$28bil, according to Solomons. The firm is backed by the Queensland government and manages money from the state and other public and private clients.

Schroders Plc is seeing a similar trend. Its Australian fixed-income business attracted about A$500mil in net new money over the past six months, while portfolio managers overseas have returned to buying Australian bonds, said Kellie Wood, head of fixed income in Sydney.

“The establishment of better value in Australian fixed income, strong performance and equity valuations remaining expensive have all contributed to positive flows for us,” Wood said. — Bloomberg

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