T. Rowe Price bets on bonds

T. Rowe Price has expanded its holdings in Australian government bonds to protect against possible errors by the Reserve Bank of Australia, while keeping its local equity exposure restrained due to concerns about stagnation combined with rising prices.

The manager’s October asset allocation update points to worries about additional interest rate increases despite growing signs of economic softening. This adjustment increases the portfolio’s sensitivity to longer-term bond yields, as it anticipates that monetary policy could overcorrect if inflation stays high while economic activity weakens.

The report explains that the move toward longer-duration bonds stems from fears of central bank missteps.

Australian stocks remain a smaller part of the strategy, despite gains in the banking and resources sectors. The overall market faces pressure from slowing economic activity, declining confidence in housing, and weaker corporate earnings, which justify the reduced weighting.

T. Rowe Price is not the only firm adopting this cautious approach. Central banks worldwide have faced difficulties in reconciling inflation control with growth support, and past policy mistakes have often led to market turbulence. The current situation echoes earlier periods when premature tightening contributed to downturns, though today’s corporate financial structures, shaped by artificial intelligence investments, raise the stakes further.

On a global scale, the firm maintains a preference for equities, with a focus on the United States, Japan, and emerging markets. In the United States, spending on AI infrastructure, particularly in data centers and semiconductor manufacturing, has boosted demand for corporate debt, though tighter financing conditions are affecting high-quality borrowers.

While AI-related investments are lifting corporate profits, the heavy capital requirements of the sector are putting downward pressure on bond returns.

In Japan, rising corporate profitability and structural reforms are supporting stock performance, though fluctuations in the yen remain a concern. Emerging markets also show strength, with domestic growth and exposure to AI-related companies driving upward revisions to earnings forecasts.

The firm continues to hold fewer fixed-income assets globally, particularly in shorter-term bonds. Cash reserves have been trimmed to redirect funds into growth-oriented assets and gold, under the assumption that financial conditions will stay supportive, though if inflation remains stubborn, further policy tightening could become necessary.

The report warns that a few additional rate increases alongside steady growth might be manageable. However, a prolonged period of high inflation would test both bond markets and riskier investments.