Australia's Sovereign Bonds Gain Favor as Global De-dollarization Accelerates 9%

Bank of America has identified Australia's sovereign bonds as a potential standout performer in a global financial landscape that is increasingly moving away from the U.S. dollar. In a recent research note, the bank's FX strategists, Oliver Levingston, Adarsh Sinha, and Janice Xue, highlighted Australia's fixed-income market as a prime destination for capital inflows amidst ongoing global de-dollarization trends.

The strategists noted that Australia's relatively small bond market could experience significant price movements if global investors continue to shift away from U.S. dollar-denominated assets. This trend is driven by growing global discomfort with U.S. financial stewardship, exacerbated by political and economic turmoil under President Donald Trump. The re-emergence of Trump on the political scene, along with aggressive trade policies and economic nationalism, has accelerated investor diversification away from the U.S. dollar.

Trump's declaration of sweeping tariffs earlier this year triggered a global market selloff, with investors pulling out of U.S. markets due to prolonged uncertainty and trade isolationism. This "Sell America" movement was characterized by heavy selling of Wall Street stocks, U.S. Treasurys, and even the dollar itself. The U.S. dollar index, which measures the greenback against a basket of leading currencies, has declined by about 9% year-to-date in 2025, marking its most significant drop in over a decade.

Investor confidence in the dollar has plummeted, with a June Global Fund Managers Survey showing that 86% of respondents believe the dollar will devalue in the coming 12 months, a new record low. The report found that fund managers have less of a long-dollar bias than at any time in the past 20 years, with almost 20 percent of the managers polled indicating that betting against the dollar was the most "crowded trade" globally.

This loss of confidence has opened the door for other currencies, particularly those linked to stable economies rich in raw materials like Australia, to gain favor with global reserve managers and institutional investors. Australia's 10-year government bond yield is about 4.24%, slightly lower than the U.S. equivalent of 4.43%. Bank of America predicts that this gap will widen in the years ahead, with Australian bonds potentially having a 75 basis point spread by late 2026, leading to stronger demand and higher prices.

The demand outlook for AUD fixed-income assets appears strong, supported by Australia’s growing superannuation funds and the possibility of bank deregulation. The rising demand for "peripheral dollar bloc assets," which are stable currencies distant from American politics and supported by strong local fundamentals, has seen the proportion of official reserves in Australian dollars double in the past decade. The strategists estimate that a 1-percentage-point lift in global reserve demand would absorb 185% of the net supply of Australian sovereign bonds for the current fiscal year.

Australia’s large pension funds have also been increasingly active in the local bond market, internationalizing their balance sheets and driving demand for AUD-denominated assets. This shift in investor sentiment towards Australia's sovereign bonds underscores the region's growing appeal in a post-dollar world, where stability and strong fundamentals are increasingly valued by global investors.