Pimco loudly calls Australian bonds a "value opportunity": as the economic cold wave begins to appear, betting on Australia turning "dovish" in the second half of next year.

This week, the Reserve Bank of Australia announced on June 16 to keep the cash rate unchanged at 4.35%. The Pacific Investment Management Company (Pimco) is currently inclined to allocate to Australian government bonds with a maturity of 5 to 10 years, betting that the RBA will eventually be forced to cut interest rates to support the increasingly slowing domestic economy. Adam Bowie, managing director of Pimco's Australian investment portfolio, said that by the end of this year, the market will "very clearly" see that the Australian economy is slowing down and inflation is gradually returning to the target range of the Reserve Bank of Australia. He expects the RBA to start cutting rates in the second half of 2027, making the 5 to 10-year maturity Australian federal and state government bonds significantly valuable. Since the RBA signaled a possible pause in rate hikes at its May meeting, Australian government bonds have outperformed those of other G7 countries. At the same time, the benchmark 10-year bond yield has declined by 20 basis points cumulatively, narrowing the spread with US treasuries to near its narrowest level since November last year. Pimco has joined a group of investors actively increasing their holdings in Australian government bonds. Weakness in the domestic job market and continuously declining consumer confidence are reinforcing the market's bet that the RBA's rate hiking cycle has ended. T. Rowe Price prefers long-term bonds, while Schroders Global Investment Management is looking for opportunities to buy Australian bonds, expecting the RBA to cut rates sooner than the market generally expects. Bowie said, "Considering that the market is still pricing in the possibility of further policy tightening, and the expectation that the cash rate will remain near current levels for several years has been digested, inflation risks seem to be priced in." He pointed out that with accumulating economic downside risks, Australian bonds currently present a "considerable value" anomaly. Australia's current economic growth momentum has slowed significantly. Data released by the Australian Bureau of Statistics on June 3 showed that seasonally adjusted GDP grew by only 0.3% in the first quarter, lower than the market's expectation of 0.5%, and a significant slowdown from the 0.9% growth in the previous quarter. Per capita GDP fell by 0.1%, marking the first per capita contraction since the first quarter of 2025. Although this was the 18th consecutive quarter of GDP growth, the pace has dropped to the weakest level since the second quarter of 2024. Grace Kim, director of national accounts at the Australian Bureau of Statistics, stated that stagnant household and public sector spending, combined with disruptions from cyclones to mining and export activities, are significant reasons for the slowdown in economic growth. Despite strong business investment, trade net figures dragged GDP down by 0.8 percentage points - with exports falling by 1.1%, marking the largest quarterly decline in two years, with disruptions in coal and iron ore transportation due to weather conditions. The economy is cooling down, but inflation remains stubborn. In the twelve months leading up to March 2026, Australia's CPI rose by 4.6% year-on-year, the highest level since September 2023, well above the RBA's target range of 2% to 3%. CPI in the eight major capital cities rose by 4.0%, with Perth reaching 4.8%. Faced with the challenging combination of "weakening economy and high inflation," the Reserve Bank of Australia announced on June 16 to keep the cash rate unchanged at 4.35%, with all nine members unanimously agreeing. Although the softening economy has prompted the RBA to pause its rate hiking cycle this week, it is not a signal of loosening. The RBA had already raised rates three times earlier this year. Since inflation still remains above the target range, the central bank has not completely closed the door to further policy tightening. The central bank explicitly warned in its statement, "If necessary to contain inflation, rates may still need to be further increased." RBA Governor Block stated that while the possibility of a rate hike was not discussed at this meeting, "demand must slow further for inflation to fall back." On Tuesday, pricing in the swap market for another rate hike has slightly declined, but traders still believe the probability of one more rate hike before the end of the year is slightly higher than fifty percent. Pricing in the futures market shows that traders are betting on a 30% probability of a rate hike in August. National Australia Bank, Commonwealth Bank, and ANZ Bank all expect the central bank to keep rates unchanged for the remainder of 2026.