Amid wobbles in artificial intelligence-related trades, global investors are flocking to Australian government bonds, seeking refuge in one of the world's safest sovereign debt markets offering the highest yields. Data tracked by Morningstar reveals inflows into Australian bond funds surpassed A$4 billion (approximately US$2.8 billion) last year, marking the highest level in four years. The current yield on Australia's 10-year benchmark government bond stands at 4.72%, the highest among developed markets.

Australia's appeal stems from its minimal exposure to the AI theme, unlike the United States and parts of Asia, as its market is dominated by banking and resource stocks. Concurrently, the Reserve Bank of Australia became the first major central bank to hike interest rates in 2026, and traders are betting on at least one more increase to curb inflation.

Nick Ferres, Chief Investment Officer at Vantage Point Asset Management, which manages around US$2 billion in assets, is among the buyers. He has significantly reduced equity exposure in his macro fund and redirected some capital into short-term Australian government bonds, which now constitute nearly one-third of the portfolio. "I'm probably in the most defensive stance I've ever been," said Ferres, who is based in Singapore. He described the AI spending by tech giants like Alphabet Inc. and Amazon as "the most insane capital misallocation in history," suggesting a pullback in such investments could trigger a broad sell-off in Asian markets. He added that Australian bonds, particularly at the short end of the yield curve, offer a new hedging alternative.

Multiple factors are converging to attract investors. Since mid-October last year, the RBA's tightening cycle has pushed the yield on Australia's 10-year government bond up by 60 basis points, widening its spread over U.S. Treasuries to the largest gap in over three years. The correlation between Australian and U.S. bond yields is also strengthening, indicating investors view them as a viable option for diversifying exposure away from U.S. debt. The 60-day correlation between the two reached its highest level in nearly a year last month.

"Even a modest reduction in U.S. Treasury holdings can have a significant impact on other markets, and this is a key driver of current demand for Australian bonds," said Brett Solomon, a Portfolio Manager at QIC Ltd., which manages A$135 billion in assets. Solomon revealed that QIC's fixed income division saw net inflows of A$5.9 billion in the 12 months to January, pushing its assets under management to a record A$28 billion. The firm, supported by the Queensland government, manages funds for the state and other public and private clients.

Schroders plc has observed a similar trend. Kerry Wood, Head of Fixed Income in Sydney, stated that its Australian fixed income business attracted approximately A$500 million in net new money over the past six months, with overseas portfolio managers also beginning to return to the Australian bond market. "The compelling value, solid performance of Australian bonds, and high equity valuations have all contributed to our inflows," Wood said, noting a particularly noticeable return of Asian investors, who show a strong preference for high-yielding Australian assets.

Although Australian bond returns have been relatively modest this year—with one benchmark gaining about 0.8%, trailing the 1.3% rise in U.S. Treasuries—Adam Bowe, Head of Australian Portfolio Management at Pacific Investment Management Company (Pimco), believes attractive relative valuations and spreads make them a preferred choice for diversified portfolios.

Australia's robust fiscal position provides another key support. It is one of only eight sovereign issuers globally to hold the highest credit rating from all major agencies. A decline in government borrowing needs, following forecasts of strong revenue, coupled with tightening bond supply just as demand is increasing, further bolsters the market. A recent government bond auction saw investor bids for A$800 million of bonds maturing in April 2029 reach nearly four times the amount offered, far exceeding the average demand since the bond's issuance in 2012. In January, the state of New South Wales attracted A$9.4 billion in orders for a bond maturing in November 2037, with over half allocated to offshore investors.

Sentiment towards the Australian dollar is also growing increasingly optimistic. Hedge funds' bullish bets have hit an eight-year high, and asset managers have turned net long for the first time since October 2024. "High yields, a AAA credit rating, a stable government and fiscal outlook, and a sound legal system make Australia an exceptionally attractive investment destination," said Pimco's Bowe.