5% US Treasury pressure weighs on global assets, while Australian government bonds open up a window for allocation? Fixed income giant Pimco calls the rate hike expectations too aggressive

According to Zhitong Finance APP, investment in AI computing power infrastructure continues to expand, and with global long-term government bond yields, including the 10-year U.S. Treasury yield, remaining elevated, one of the world’s largest fixed income investment giants-Pacific Investment Management Co. (Pimco)-is turning its fixed income allocation focus to the Australian economy's resilience to high interest rates and yields.

Adam Bowe, Pimco’s Head of Portfolio Management based in the Australian market, believes both institutional and individual investors are too aggressive in their expectations for future rate hikes by the Reserve Bank of Australia. He emphasizes that recent ongoing data center investments from AI tech giants such as Amazon, Microsoft, and OpenAI in Australia can support parts of economic activity and rising financing costs. This fund manager also indicated that rising unemployment, a cooling real estate market, and household debt pressures in Australia may significantly limit the central bank’s ability to continue its tightening cycle.

Therefore, with the 10-year Australian government bond yield rising to its highest level since 2011, Pimco believes that 5- to 10-year Australian bonds now offer attractive absolute and relative value, hoping investors can seize the opportunity for price recovery in the Australian government bond market brought about by a sharp pullback from already aggressive rate hike expectations.

As of the Monday midday Asian trading session on September 28, the global government bond market was still facing heavy selling pressure in long-term government bonds. The 10-year U.S. Treasury yield continued to hover near its highest level since 2007, at one point climbing to 5.215% during the Asian session. Yields on Australian and Japanese government bonds of the same maturity lingered around 5.41% and 3.10% respectively, with the 10-year Japanese government bond yield hitting its highest since 1996. Both Japanese 20- and 30-year yields also hit multi-decade highs. On September 18, the Bank of Japan raised its policy rate from about 1.00% to about 1.25% and made clear that high oil prices, a weakening yen, and AI-related demand are raising business costs, with part of the pressure beginning to pass through to consumer prices, and that wage increases and inflation expectations are also intensifying.

The driving factors behind this global rise in long-term bond yields are the combination of energy inflation, expectations for policy rates, and debt supply pressure closely tied to AI infrastructure progress. Trump’s rejection of Iran’s latest proposal to reopen the Strait of Hormuz has kept oil prices affected by supply uncertainty; Brent crude reached about $106.31 per barrel during Asia hours on September 28. Growing financing needs from both governments and AI companies are intensifying the competition for global savings.

The direct catalysts and drivers of the global bond market’s adjustment can be summed up as the market’s reassessment of how long it will take for energy supplies to recover, how many more times the Federal Reserve needs to raise rates, and, most importantly for the 10-year and longer U.S. Treasury yield curve, the structural force of “rising fiscal deficits + AI bond issuance” competing for global duration bond capital pools.

Pimco sees Australian bonds as a positive investment opportunity, saying the market is overpricing rate hike expectations

Pacific Investment Management Co. has become increasingly optimistic about Australian sovereign bonds, which have suffered from depressed prices in recent years. It believes that given Australia’s slowing economic growth trajectory, the market expectation for rate hikes has gone too far and the aggressive pricing of rate increases is seriously off the mark.

Adam Bowe, Pimco’s Head of Australian Portfolio Management based in Sydney, said the Australian rate hike cycle has been "fully priced in" by the market and that key cracks in the economy are beginning to emerge. He told the media on Monday that this gives Australian bonds exclusive appeal, especially in the 5- to 10-year part of the yield curve, i.e., the medium- to long-term sector.

“Australian bonds themselves are attractive, including relative to other markets,” said Bowe. The U.S. Federal Reserve and the Reserve Bank of Australia "are both working to bring inflation back to target levels while avoiding economic damage, but I think the fault lines in the economy are more evident here," he said in the interview.

Pimco’s view comes as domestic Australian indicators show economic momentum weakening significantly, notably with unemployment near a five-year high and a slowdown in the property market, which is crucial for the economy. With the yield on the benchmark 10-year Australian bond rising to its highest since 2011, investors are being given an opportunity to catch the market’s bottom.

As shown in the figure above, the yield on 10-year Australian government bonds is at its highest level since 2011.

Since mid-year, Adam Bowe has been bullish on Australian bonds, anticipating that the Reserve Bank of Australia will eventually be forced to cut rates to support the cooling economy.

However, short-term monetary policy tightening risks remain high, probably further pushing up yields on short-term Australian government bonds. Traders unanimously expect the Reserve Bank of Australia to raise rates at the end of its two-day policy meeting on Tuesday, bringing the cash rate to its highest since November 2011, possibly followed by another rate hike in November. The latest Bloomberg Intelligence rate swap data shows the market sees a startling three-quarters probability of two more hikes next year, which would push the benchmark rate above the critical 5% level for the first time since 2008.

Still, this global top fund manager from Pimco believes the domestic Australian economy can't withstand such an aggressive interest rate path.

Bowe warned that while data center capital spending may keep the economy resilient for the next two years, there is a deeper “structural fragility” in Australia's indebted households. He stressed that the proportion of tax burden and mortgage repayments to income is near historical highs, making it hard for consumers to bear a 5% cash rate.

“The harder they tighten policy, especially if rates go to around 5%, I think the risk of a deep homegrown recession in Australia is real,” Bowe said. Given yields are already attractive and economic growth is showing signs of slowing, “I’m optimistic on the outlook for Australian bonds,” he emphasized in the interview.

“Rate Sensitivity” emerges: Computing power must still expand; Australian household cash flows tested first

Undoubtedly, global demand for financing associated with AI infrastructure has not cooled off, which is why tech giants like Alphabet (Google’s parent), Amazon, and others are now eyeing the Australian dollar-denominated bond market.

According to previous media reports on September 1 citing LSEG data, Alphabet, Amazon, Meta, Microsoft, and Oracle had already issued about $220 billion in debt this year, more than twice the total for all of 2025; on September 22, Goldman Sachs predicted that mega cloud providers could issue a record $420 billion in total debt by 2027. The latest example is SoftBank, which has finalized about $11.1 billion in bond issuance terms, with $4.5 billion in 7.5-year dollar bonds at a 9.75% coupon, expected to be issued on September 29, mainly to fund follow-up investments in OpenAI and general corporate purposes. Strong financing willingness and clearly rising funding costs are happening simultaneously.

From an engineering and investment logic perspective, agents expanding single-turn Q&A into planning, search, tool execution, and repeated verification increases the need for model calls, CPU tasks, memory state saves and storage access; when user and task scale expansion outpaces unit task efficiency improvement, IT infrastructure for computing power must still grow. However, demand growth no longer automatically equates to improved investment returns: new financing costs depend on the relevant term's risk-free rate, credit spreads, and deal conditions, while construction delays lengthen the gap between capital input and income realization. As the “anchor of global asset pricing,” rising 10-year U.S. Treasury yields not only lift the cost benchmark for long-term financing and refinancing but also raise the required return threshold for equity valuations, forcing the market to focus on whether AI companies’ profit growth can translate into free cash flow.

This division in the Australian financial market can be summarized as a “rate sensitivity gap”: AI investments backed by orders and capital may continue to withstand higher financing costs, while indebted households will first cut back on consumption to cope with repayment pressure. The Reserve Bank of Australia noted in August that planned home loan and consumer credit repayments in Q2 have reached nearly 12% of disposable household income, approaching the 2024 peak. This is why Pimco’s contrarian logic begins to make sense: should consumption and employment weaken further, forcing the real rate hike path below market pricing, 5- to 10-year Australian bonds could enjoy both record high interest income and double capital gains from falling yields.