Global investors including hedge funds are increasing allocations to Australian government bonds as concerns grow over stretched valuations tied to the artificial intelligence boom, according to a report by Bloomberg citing data from Morningstar.
Inflows into Australian bond funds tracked by Morningstar exceeded AUD4bn in 2025, the strongest annual intake in four years, as investors seek higher-yielding and lower-risk sovereign debt. Australia’s 10-year government bond yield, at around 4.7%, remains the highest among developed markets, enhancing its appeal at a time when investors are reassessing exposure to US technology-heavy equities.
Australia is seen as relatively insulated from AI-related volatility due to its banking- and resources-focused equity market. At the same time, the Reserve Bank of Australia has moved ahead of other major central banks by raising interest rates in 2026, with markets pricing in further tightening to curb inflation.
Hedge fund managers are among those rotating into the market. Nick Ferres, chief investment officer at Vantage Point Asset Management, said he has cut equity exposure sharply and redeployed capital into short-dated Australian government bonds, which now account for nearly a third of his macro fund.
Demand has also been supported by diversification needs, with Australian yields increasingly moving in line with US Treasuries. Portfolio managers say even modest reallocations away from the US can have a significant impact on Australian fixed-income markets.
Large asset managers including Schroders and Pacific Investment Management Co have reported renewed interest from offshore investors, particularly from Asia, citing attractive carry, relative valuations and Australia’s strong fiscal position.
Australia remains one of a small group of sovereign issuers holding top-tier credit ratings from all major agencies, while reduced bond supply has further supported prices. Recent auctions have seen robust demand, with offshore investors taking a significant share of issuance.
Hedge funds have also turned increasingly bullish on the Australian dollar, adding to the broader appeal of Australian assets as investors seek stability amid growing uncertainty around global equity markets and the durability of the AI-driven rally.
