Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 336

Have bonds reached the end of the line?

Bond markets typically perform well during periods of economic uncertainty. All else being equal, decelerating economic growth dampens inflationary pressures, increases the probability of interest rates heading lower.

That has certainly been the case over the last year or so. Economic conditions have softened both within Australia and offshore, and policymakers are debating whether further cuts are warranted.

The deteriorating economic background has been reflected in the local fixed income market. Yields on 10-year Commonwealth Government Securities have more than halved over the past 12 months, from over 2.70% in November 2018 to around 1.20% today. Remember, there’s an inverse correlation between bond yields and prices; the sharp move lower in yields has resulted in favourable returns from fixed income portfolios.

So far so good, but what now?

That’s great for investors who’ve had exposure to bonds recently, but what does it mean for the outlook going forward? Investors are increasingly questioning whether it might be time to lock in gains and remove allocations to fixed income investments. Official interest rates are negative in Europe and Japan and are being lowered elsewhere, most notably in the US. Moreover, increasingly accommodative policy settings by global central banks have driven yields below zero on more than a quarter of government bonds on issue worldwide. How much lower can they go?

It is understandable that investors are questioning whether bonds still have a role to play in portfolios.

In our view, they certainly do. In the interests of full disclosure, First Sentier Investors currently manages more than $15 billion of Australian fixed income securities, so our view probably won’t surprise too many people. But, even after putting unintended biases to one side, there remains a clear case to support ongoing allocations to defensive, income-oriented investments like bonds.

The asset class has an important role to play in most well-balanced, diversified portfolios, even though the future return profile is less appealing than it has been in the past.

The historical reasons for holding bonds include:

1. The low-risk profile 

Even though the overall indebtedness of most countries is increasing worldwide, the risk of default on debt issued by sovereigns in their own currency remains extremely low. Currently, Australian government debt is rated AAA by Moody’s, the maximum possible rating and one that’s only awarded to a handful of issuers worldwide. With the ability to print currency if required to meet debt repayment obligations, the likelihood of non-payment is very low.

2. A reliable source of income

Again, almost all bond issuers – including both governments and companies – are well placed to service their debt-servicing obligations and make regular coupon payments to investors.

While some global bonds are now showing negative yields to maturity, Australian government bonds still offer positive and secure income for investors. Most securities make coupon payments semi-annually. Yields and potential income are higher in corporate debt markets but with an inherently higher risk profile. With interest rates so low, most companies are currently able to comfortably meet their debt repayment obligations and profitability is holding up quite well among high quality firms. Accordingly, while the risk profile of corporate debt is always evolving, credit markets continue to offer opportunities for income-based returns with a relatively low risk of capital loss.

3. A hedge against falls in equities

Allocations to fixed income securities have historically helped preserve capital during equity down markets, effectively providing a cushion against falling share prices.

Even with yields below zero in some regions, the historical negative correlation between equities and bonds during periods of equity market stress is expected to persist worldwide. During times of elevated uncertainty, a ‘flight to quality’ into defensive assets with perceived capital security and plentiful liquidity would be anticipated, helping to maintain the historical relationship between equities and bonds.

Scope for capital appreciation from Australian bonds

If cash rates are lowered further in 2020, government bond yields could conceivably come under further downward pressure. This would push prices higher, augmenting income from coupon payments and lifting total returns. With yields at ~1.20% instead of ~2.70%, the expected return profile of Australian bonds is clearly lower than it was a year ago.

But, importantly, all of the above characteristics are likely to hold over the medium term, underlining the ongoing appeal of bonds as part of a broader asset allocation mix.

 

Stephen Cooper is Head of Australian Fixed Income at First Sentier Investors, a sponsor of Firstlinks. This article is for general information only and does not consider the circumstances of any individual.

For more articles and papers from First Sentier Investors, please click here.

 

  •   11 December 2019
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Bonds are copping a bad rap

The case for high yield bonds

Things may finally be turning for the bond market

banner

Most viewed in recent weeks

2 billion reasons to fix retirement income

A proposal to address Australia's 'stranded balances' in retirement by requiring super funds to transition members to pension phase at 65, boosting retirement income and reframing super as a source of income.

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Latest Updates

Investing

Markets without a margin for error

From US fiscal pressure to China’s shifting growth model and Australia’s structural constraints, markets are yet to reflect a less forgiving global investment landscape.

Investment strategies

The investment mistake killing your returns

Retail investors face an increasingly complex product environment, but simplicity may be the most overlooked advantage in building a portfolio you can actually live with.

The ticking clock on oil reserves

A sustained disruption through the Strait of Hormuz is forcing a rapid drawdown of global inventories. Without a resolution, the arithmetic points to a supply shock by early August and a sharp surge in the oil price.

Infrastructure

Managing the impact of the Middle East conflict on listed infrastructure

The outbreak of conflict in the Middle East in February 2026 marks an historic shock for oil and gas markets, with major implications for inflation, interest rates and ultimately for listed infrastructure companies.

Economy

Rent inflation and the missing policy

The government plans to remove negative gearing to help renters buy homes. For those who remain renters, the wrong levers are being pulled to try and increase rental unit supply.

Investment strategies

The Risk-Wealth Paradox: Why more money means you should take less risk

As wealth grows, so does the assumption that risk should too. But in reality, the opposite may be true: once you understand how the value of money changes over time, the case for taking less risk becomes far more compelling.

SMSF strategies

SMSF estate planning: Eight things to consider

As super balances grow, SMSFs are becoming central to retirement outcomes. Without proper planning for “Armageddon” scenarios, even well-structured funds can unravel when it matters most.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.