Emma Lawson, Fixed Interest Strategist – Macroeconomics in the Janus Henderson Australian Fixed Interest team, provides her Australian economic analysis and market outlook.
Market review
Australian bond yields moved sharply higher during August as stronger-than-expected inflation data and resilient economic activity prompted investors to increase expectations for further Reserve Bank of Australia (RBA) tightening. The Bloomberg AusBond Composite 0+ Yr Index declined 0.2% over the month, reflecting the upward move in government bond yields.
The RBA cash rate was unchanged at 4.35%, while three and six-month bank bill rates rose 5 basis points (bps) to 4.55% and 4.88% respectively. Australian three-year government bond yields increased 17bps to 4.66%, while 10-year yields also rose 17bps to 5.09%. The 10-year inflation-linked bond yield was marginally lower at 2.33%.
Global bond markets remained under pressure as investors weighed resilient activity, persistent inflation and elevated government borrowing requirements. Despite intermittent periods of uncertainty, risk appetite remained broadly constructive and demand for income-producing assets continued to provide support for credit markets. At the same time, investors remained cautious about rising prices with inflation remaining above target for longer than expected, contributing to upward pressure on longer-dated bond yields. The Australian bond market moved to a fully priced rate hike by the end of this year. This combination of resilient risk sentiment and higher government bond yields characterised much of the month’s market activity.
Domestically, the monthly inflation data was the key market event. Headline CPI printed at 3.5%yoy in July, while trimmed mean inflation was steady at 3.6%yoy, both above market expectations and reinforcing concerns that underlying inflation remains sticky. The labour market softened modestly, with employment falling 15.8k and the unemployment rate increasing to 4.5%, although wage growth remained steady at 3.2%yoy. Consumer confidence improved during the month, while business activity remained in expansionary territory, suggesting domestic demand continues to hold up despite restrictive monetary policy.
Credit markets remained resilient despite the rise in government bond yields. Strong demand for income-generating assets and a constructive corporate backdrop supported credit performance. The Australian fixed rate credit index returned -0.1%, while the floating rate credit index returned +0.4%. Reflecting the supportive environment for credit, the Australian iTraxx Index tightened 3bps to 67bps by month end.
Market outlook
We continue to see one last RBA hike to 4.60%, before shifting the pricing of an easing cycle in the second half of 2027. While we hold no specific tilt at present, our high case is one where inflation remains elevated and the RBA are forced to raise interest rates more than expected into 2027. Our low case reflects a weaker economic outcome, particularly if supply constraints and rising costs act as a tax to subdue growth. We hold a small, long duration position and continue to take advantage of opportunities in volatile markets.
We expect volatility to remain structurally elevated as geopolitical and macro risks persist whilst left-tail risks continue to proliferate. To the latter, we would add disruption risks (and opportunities) related to the accelerating impact of AI on a significant part of the global economy. In recognition of the complex and bifurcated investment environment, our credit strategy remains skewed towards high-quality, investment-grade issuers who benefit from resilient business moats, solid earnings power and conservative balance sheets. Conversely, we are avoiding economically sensitive, lower credit quality and leveraged corporate and consumer focused sectors where default stress remains elevated, or which are highly exposed to AI disruption. Credit spreads and all-in yields particularly in low/no default-risk Australian Investment Grade credit remain reasonably attractive versus global credit. In our view, high quality Australian credit will remain resilient through a range of macro-economic environments. We have taken advantage of improved market conditions to realise profits on positions which have performed well, have built ample capacity to take advantage of likely periods of opportunity, and have prudently elected to maintain material levels of inexpensive credit protection to protect against downside left-tail risks. Notwithstanding, we remain constructive and are well-invested across our client portfolios.
Views as at 1 September 2026.
