Thomas Poullaouec, Head of Multi-Asset Solutions International and portfolio manager at T. Rowe Price, along with the T. Rowe Price Asian Investment Committee, noted that the Federal Reserve's earlier rate hike can be viewed as a partial withdrawal of the precautionary rate cuts implemented last year to guard against downside economic risks.
Currently, capital expenditure and demand remain solid, signaling that economic growth is expected to stay resilient, while strong corporate earnings provide support for equity markets. Given current valuation levels, the firm continues to maintain an overweight allocation to emerging markets and Asia ex-Japan equities in order to capture AI-related investment opportunities.
T. Rowe Price noted that the Federal Reserve is only gradually tightening monetary policy rather than slamming on the brakes. The trajectory of inflation will determine the magnitude of future rate hikes by the Fed. Policymakers appear to place greater emphasis on the breadth and persistence of inflationary pressures. If economic growth remains strong while price pressures show no signs of easing, the likelihood of further Fed rate hikes will increase, supporting a strategy of maintaining shorter-duration bond allocations. If economic growth stays resilient, the market should be able to digest several rate hikes with relative ease. However, if inflation remains persistently elevated and forces the Fed into a longer rate-hiking cycle, it could weigh on longer-duration bonds and risk assets such as equities.
The AI investment cycle is entering a phase with greater capital demands, and funding sources are no longer limited to the balance sheets of hyperscale cloud service providers. Corporate bonds, data center financing, and chip-collateralized financing arrangements are gradually forming an independent AI credit financing ecosystem. The share of bonds issued by AI-related hyperscale cloud service providers and infrastructure companies in the U.S. investment-grade corporate bond benchmark index has risen from approximately 5.4% at the end of 2025 to 8.3% currently. Companies are progressively advancing AI applications into large-scale practical operations, even as related regulatory and safety concerns attract growing attention.
Sustained AI investment and application penetration continue to support the firm's overweight allocation to U.S. growth stocks. The risk of further rises in bond yields remains the primary reason for the firm's underweight allocation to investment-grade bonds, while the large volume of AI-related bond issuance also brings additional pressure on market supply and demand. In other words, the same wave of AI investment enthusiasm can both support corporate earnings growth and require massive financing, placing greater supply pressure on the investment-grade bond market.
Fixed income overall remains underweight, but the preference for shorter-duration bonds has been reduced. Due to structural factors such as government fiscal financing needs, rising term premiums, and increasing capital demands, bond yields are expected to remain at elevated levels. Following the recent repricing of U.S. interest rates, the appeal of adopting a shorter-duration allocation has relatively diminished.
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