As international investors pivot out of the U.S., another part of the world — and its bond market in particular — is gaining attention, according to Bank of America. The analysts pointed to Australia’s bond market as potential beneficiary of the dollar losing its safe haven status. Dedollarization Market volatility under U.S. President Donald Trump’s presidency has led some investors to diversify to other markets in 2025. Trump’s controversial trade policies sparked a “Sell America” trade earlier this year that raised questions about dedollarization as investors cashed out of U.S. Treasurys, Wall Street stocks and the greenback. The U.S. dollar index , which measures the greenback against a basket of major rivals, is down 9% so far this year. .DXY YTD mountain Price of the U.S. dollar index so far this year. In a note on Wednesday, FX strategists at Bank of America forecast significant price moves ahead for Australian sovereign debt, in part because of the dedollarization trend. They suggested the country’s fixed income market could see an inflow of capital as U.S.-focused positions were reassessed — but noted that even a modest rotation out of U.S. dollar-denominated assets had the potential to “overwhelm AUD fixed-income and [lead to] outsized price movements.” In its most recent Global Fund Managers Survey, published last week, Bank of America found that fund managers were the most underweight on the U.S. dollar then they have ever been in 20 years. One in five of the 222 fund managers — who collectively manage assets worth $587 billion — polled this month said they saw a short U.S. dollar position as the most crowded trade. “High-frequency data” suggests foreign and official demand for the Australian dollar may be “intensifying,” BofA’s Oliver Levingston, Adarsh Sinha and Janice Xue said in a Wednesday note. ‘Major impact’ on pricing “For small fixed-income markets like Australia’s, a modest rotation out of USD assets could have a major impact on market pricing,” they added. “Dedollarization was a major theme on our trip to the United States and Canada, and we continue to highlight the significant impact small shifts in global fund managers’ asset allocations could have on the demand profile for AUD fixed income.” So far this year, the yield on Australia’s benchmark 10-year government bond has cooled slightly to around 4.24%. On Friday, the yield gained 1 basis point. Bond prices and yields move in opposite directions, and 1 basis equals 0.01%. Comparatively, the yield on the benchmark U.S. 10-year Treasury was last trading at around 4.43% — giving the two assets a spread of 19 basis points. AU10Y US10Y YTD line The chart shows the yield on the Australian 10 year government bond versus the U.S. 10 year Treasury. Bank of America’s strategists said they expected that spread to widen further in the coming years, as demand for Australian sovereign debt surged. Noting that the bonds were “highly sensitive to shifts in global reserve manager demand,” they forecast that demand would exceed supply by 2027/28. “We recommend going long spreads and see AU 10y bonds trading 75bps rich vs USTs … by end-’26,” they wrote. A wider spread of 75 basis points would imply stronger Australian bond prices relative to U.S. Treasurys. ‘Peripheral dollar bloc assets’ Part of the appeal, according to Levingston, Sinha and Xue, is rising demand for what they referred to as “peripheral dollar bloc assets.” Over the past decade, the share of official reserves — that is, assets held by central banks — denominated in Australian dollars has doubled, they said. Another 1-percentage-point gain in global reserve demand would translate to 185% of net supply of Australian sovereign bonds in the current fiscal year, they added. Conversely, demand for U.S. Treasurys — historically seen as a safe investment in times of macroeconomic or geopolitical turmoil — has been shaky this year. In the aftermath of Trump’s so-called “liberation day” tariffs announcement, U.S. Treasurys sold off , pushing yields — representative of government borrowing costs — higher, and prices of the bonds lower. “Coupled with tailwinds from Australian superannuation [pension] funds’ rapidly growing footprint in AUD fixed-income markets and potential bank deregulation, the demand profile for AUD fixed income looks robust,” BofA’s Levingston, Sinha and Xue said in their note. “In our view, AUD bonds’ high sensitivity to small shifts in global reserve demand for AUD assets has not been priced. On a comparative international basis, AUD term premium looks excessively high.”
