AI to outweigh inflation fears in fixed income markets: Allspring

Rising energy prices and geopolitical tensions may be dominating fixed income markets today, but Allspring Global Investments head of global macro strategy Noah Wise believes Artificial Intelligence (AI) will become the far more significant force, shaping bond markets over the next year.

Speaking in Sydney, Wise said investors heavily focused on inflation risks following recent volatility in rates markets and ongoing instability in the Middle East.

However, he argued markets were overlooking the longer-term disinflationary impact of AI and technological productivity gains.

"AI is fundamentally a technology of abundance," Wise said.

"It is a positive supply shock. It is disinflationary."

Wise compared current investor sentiment to market fears around tariffs and trade disruptions in 2025, which ultimately faded as a dominant macro concern.

While recent energy shocks have pushed yields higher and renewed speculation around tighter monetary policy, he expects the market narrative to shift over the next six to 12 months as AI driven productivity improvements begin feeding through economies more broadly.

The changing backdrop, he said is creating selective opportunities across global fixed income markets.

Wise noted investors were increasingly chasing headline yields without fully differentiating between the underlying risks driving those returns leading to valuation distortions between regions.

In Europe, he said bond yields had risen sharply despite weakening economic fundamentals and growing pressure on corporate margins from higher energy costs.

By contrast, US credit markets appeared relatively more resilient due to stronger macroeconomic conditions, greater exposure to energy producing industries and the likely economic benefits of AI adoption.

"We see fundamentals on a relative basis improving in the US, and yet credit spreads are lagging," he said.

Wise also suggested markets may be underestimating the potential for lower short-term US interest rates under incoming Federal Reserve chair Kevin Warsh.

While investors are currently pricing limited scope for rate cuts, Wise said he expects future monetary policy to rely less on balance sheet expansion and more on traditional rate settings.

Wise notes that could create opportunities at the front end of the US Treasury curve even as longer dated bond yields remain under pressure.

"It's an environment where higher yields are creating opportunity," Wise said.