Allianz Global Investors has released its September fixed income outlook, noting that with the US-Iran conflict yet to be fully resolved, markets are concerned that elevated energy prices may continue to push inflation higher, weighing on long-duration sovereign bond prices.

By region, Japanese bonds were the worst performers, while US and UK bonds outperformed the eurozone. The US Treasury's multi-billion-dollar buybacks of long-dated Treasuries only helped smooth volatility without driving yields lower. Rising rate hike expectations pushed short-end yields higher, flattening yield curves broadly. In foreign exchange markets, the US dollar weakened against major currencies, while commodity-linked currencies shone; emerging market bonds and corporate credit generally outperformed, with high-yield bonds particularly standout.

Allianz Global Investors points out that markets have entered a new phase of tightening monetary conditions. In early September, ultra-long sovereign bonds were sold off, with yields climbing to multi-year highs. The European Central Bank raised rates by 25 basis points to 2.50% while revising up inflation expectations, and oil prices once again topped $100 per barrel. Even with US Treasury market interventions in August-September, the bond market received no significant boost, with 10-year Treasury yields approaching 5% and 30-year yields oscillating below 5.4%. Compared with the persistently suppressed yield levels after the 2008 financial crisis, current yields appear elevated, but relative to long-term historical averages, sovereign bond yields remain not particularly high. This shift is more of a market regime paradigm change rather than a simple bond crisis.

Multiple drivers underlie this paradigm shift: rising inflation risks, expanding fiscal deficits, and governments and tech giants competing for capital to build AI infrastructure, further intensifying global competition for funds. Allianz Global Investors believes there is no significant bubble in current bond valuations, and the era of accommodative monetary policy is orderly coming to an end. Since Trump's second term began, the US 10-year Treasury yield has largely fluctuated within a roughly 90 basis point range, and overall movements have been fairly orderly despite market rhetoric about a bond market crash. Of course, various risk concerns remain.

Fixed income investment approaches must also evolve, departing from the old framework of artificially suppressed interest rates. For fixed income investors, higher yields are not entirely negative—the return appeal of bonds themselves is returning, which could encourage investors to increase bond allocations; rising yields also enhance bonds' relative value versus equities, making them an important complement to equity portfolios. Since 2020, traditional multi-asset strategies have been under pressure, with stocks and bonds often weakening simultaneously during market downturns, rooted in above-expected inflation, and markets once viewed 5% yields as abnormal. As "higher rates for longer" gradually becomes reality, bonds may once again play a risk-hedging role.

Allianz Global Investors states that higher yields bring compounding returns that can offset equity portfolio volatility. In a reflation and rate-hiking environment, floating rate notes issued by financial institutions hold investment value, with coupons rising alongside rates. Meanwhile, Allianz Global Investors is bullish on emerging market bonds and Asian high-yield credit—on one hand, overall yields are attractive; on the other hand, sovereign and corporate credit fundamentals are steadily improving, with relatively lower dependence on the AI investment boom.