Fixed interest markets declined over the September quarter as government bond yields rose across major markets amid persistent inflation pressures and expectations that interest rates may need to remain elevated or rise further. Renewed tensions between the US and Iran pushed oil prices higher early in the quarter, adding to inflation concerns, while resilient economic activity also kept the possibility of further policy tightening in focus. In September, the US Federal Reserve increased its target rate by 0.25 percentage points to 3.75% – 4.00%, its first increase since 2023. The Reserve Bank of Australia also raised the cash rate by 0.25 percentage points to 4.60%, its fourth increase of the year, as stronger-than-expected inflation and renewed energy price pressures reinforced concerns around the inflation outlook.
Government bond yields rose over the quarter, resulting in lower bond prices and negative fixed interest returns. The 10-year Australian Government Bond yield increased from 4.72% to 5.35%, weighing on the Bloomberg AusBond Composite 0+ Yr Index, which fell -1.5%. Global fixed interest experienced greater weakness as the 10-year US Treasury yield rose sharply from 4.47% to 5.29%. The Bloomberg Global Aggregate Bond Index (hedged) declined -2.4% over the three months, with much of the increase in US yields and resulting market weakness occurring in September.
Credit markets were mixed over the quarter. Rising government bond yields and wider credit spreads, which represent the additional return investors require to hold corporate bonds rather than government bonds, weighed on global credit returns. The Bloomberg Global Aggregate Credit Index (hedged) fell -3.0%, while the Bloomberg Global High Yield Index (hedged) was more resilient, declining -2.0% despite a larger widening in credit spreads. High-yield bonds generally have shorter maturities, making their prices less sensitive to rising government bond yields. In contrast, Australian investment-grade credit remained positive, with the Bloomberg AusBond Credit FRN 0+ Yr Index rising +1.2%, supported by relatively high short-term interest rates despite a modest widening in Australian corporate bond spreads.
Fixed interest markets faced headwinds over the quarter as rising yields weighed on returns across duration-sensitive strategies. Daintree Core Income Trust (+1.4%) delivered the strongest result, with coupon income and near-zero interest rate exposure effectively shielding returns as bond yields rose. Realm Short Term Income (+1.3%) generated solid returns led by structured credit, corporate bonds, and bank subordinated debt, with very low duration limiting the impact of rising yields. Western Asset Enhanced Income (+1.1%) was supported by income from investment-grade corporate and structured credit securities, while low interest rate sensitivity helped preserve capital. Yarra Enhanced Income (+0.3%) posted a modest gain as carry and subordinated debt income were largely offset by duration headwinds. Janus Henderson Australian Fixed Interest (-1.7%) declined as duration exposure amplified the impact of rising Australian bond yields, partially offset by an overweight to corporate bonds. Western Asset Australian Bond (-1.7%) fell as rising yields weighed on returns, with a modest duration overweight detracting, partly offset by corporate credit and semi-government holdings. Macquarie Dynamic Bond (-2.4%) was hurt by overweight positions in Australian and New Zealand rates, with bank capital and corporate hybrid credit providing only partial offset. PIMCO Global Bond (-3.3%) was the weakest performer as global yields spiked, with UK and US duration and agency mortgage exposures detracting, partially mitigated by underweights to Japanese and Singaporean duration.
Realm Short Term Income was reduced and Bentham Global Income was exited, with the proceeds redirected into Western Asset Australian Bond and Janus Henderson Australian Fixed Interest, both increased, and a new allocation introduced to Macquarie Dynamic Global Bond Fund. Once currency hedging is taken into account, global bond yields have become attractive, offering fair compensation for risks such as global inflation volatility and a lack of fiscal discipline. At the same time, an overweight to longer-duration Australian bonds has been added, as this is expected to provide protection for the portfolio if economic growth weakens further, supporting a shift away from shorter-duration, credit-focused strategies and toward higher-quality, longer-duration exposure.