What the current rate environment means for your bond portfolio, by Matthew Macreadie, Income Asset Management.
Over the past several months, the Reserve Bank of Australia has raised the official cash rate three times in succession, returning it to 4.35% — levels last seen at the peak of the post-pandemic tightening cycle. We appreciate that, for investors who hold fixed-rate bonds purchased in prior years, this environment can feel uncomfortable. We are writing to address that directly — and to share why we believe now represents one of the more compelling entry points for bond investors that we have seen in over a decade.
For existing investors: your investment is working as intended
If you purchased fixed-rate bonds prior to this rate cycle, your position is doing exactly what it was designed to do. The yield you locked in when you invested is the yield you will earn — guaranteed — provided you hold to maturity. Bond prices fluctuate in the secondary market as interest rates rise and fall, but those movements are paper only. The contractual income stream you purchased on day one remains entirely intact. At maturity, you will receive the full face value of your investment.
This is the fundamental and often under-appreciated distinction between bonds and equities: the return, in an important sense, is known from the outset. Rising rates do not change that.
The opportunity for additional investment
What rising rates do change is the yield available on new investments — and here, the picture is genuinely attractive. Australia’s 10-year government bond yield is now hovering around 5%, close to its highest level since 2011. For corporate and private credit instruments margins above the risk-free rate have also widened, meaning total returns available to new investors today are materially higher than they were twelve, eighteen, or twenty-four months ago.
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For existing investors, this creates a straightforward opportunity: by adding to your position at current yield levels, you raise the average yield of your total holding. Even if your earlier investment was made at a lower rate, blending new capital in at today’s yields lifts the overall return profile of your portfolio. This is sometimes called “averaging up” your yield — and it is a strategy that sophisticated fixed income investors have employed throughout every rate cycle.
The bond market moves before the RBA does — timing matters
This is, perhaps, the most important insight we want to share. While the RBA’s cash rate is the most visible benchmark in the market, it is a lagging instrument — it reflects decisions taken by a committee in response to data that is already published. Bond markets, by contrast, are forward-looking. They continuously price in investor expectations about where the economy — and therefore rates — are headed.
The 10-year bond rate tends to lead short-term rates because of forward guidance from the RBA and investor expectations about the domestic economy. We have seen this play out clearly in the most recent rate cycle: Australian 10-year bond yields peaked in November 2023 at approximately 5.27% — the same month as the RBA’s final hike of that cycle. By early 2024, bond yields had already declined significantly from their peaks, even as the RBA held its cash rate flat. The RBA did not make its first cut until February 2025 — some 15 months after the bond market had already moved. Investors who moved at or near the peak locked in both high running yields and meaningful capital appreciation as bond prices subsequently rose.
We are seeing the early stages of an analogous setup today. The RBA has hiked three times in 2026, and market forecasters anticipate further increases may follow, with the cash rate potentially reaching 4.85% by year-end. We do not dispute that further hikes are possible. But we would caution investors against waiting for the RBA to stop before acting. Those who wait for the all-clear from the RBA are likely to find that the best entry point has already passed. Across three recent Australian rate cycles, the bond market has peaked and begun its decline an average of 12–15 months ahead of the first rate cut.
What we are doing for our investors
We are actively deploying capital into new investments at yield levels that, in our view, will look attractive in retrospect — much as 2022-vintage investments in private credit do today.
In the current environment, we are seeing:
- Wider credit margins that translate directly to higher income for our investors
- Stronger overall yields as elevated base rates compound with expanded credit spreads
- A growing pipeline of opportunities as borrowers seek non-bank solutions where bank lending conditions have tightened.
