Pacific Investment Management Co. is taking an increasingly constructive stance on Australian bonds, arguing that market expectations for interest-rate hikes have gone too far in the face of a slowing local economy. Australia’s rate-hike cycle is “fully priced,” and cracks in the economy are becoming visible, said Adam Bowe, head of Australian portfolio management at Pimco in Sydney. That’s making Australian bonds look attractive, particularly in the five- to 10-year section of the yield curve.

Bowe said Aussie bonds look attractive on their own right, but also relative to other markets. The Federal Reserve and the Reserve Bank of Australia are “trying to bend inflation back to target without breaking the economy, but I think economic cracks are more visible here,” he said. Pimco’s call comes as domestic indicators point to fading economic momentum, highlighted by unemployment near a five-year high and a slowing housing market. The timing offers investors an entry point to catch a market bottom, with yields on Australian benchmark 10-year bonds reaching their highest level since 2011.

Bowe has favored Australian debt since mid-year on expectations the RBA will eventually be forced to shift toward rate cuts to support the cooling economy. Still, near-term policy risk remains elevated. Traders expect the RBA to raise interest rates at the conclusion of its two-day policy meeting on Tuesday, pushing the cash rate to its highest level since November 2011. Swaps data compiled by Bloomberg show markets see a three-in-four chance of two additional hikes next year, which would take the benchmark rate above 5% for the first time since 2008.

Pimco, however, contends the domestic economy cannot withstand that trajectory. While capital expenditure on data centers may keep the economy resilient for a couple of years, Bowe warned of a deeper “structural fragility” among indebted Australian households. As a proportion of income, tax burdens and mortgage repayments are already near record highs, leaving consumers ill-equipped to absorb a 5% cash rate, he said. “The further they push it, particularly with rates if they get up to around 5%, I think recession risks are real,” Bowe said. With already attractive yields and signs growth is slowing, “I’m constructive on the Aussie bond outlook,” he said.