After Australian 10-year government bond yields climbed as high as 5.2 per cent earlier this week, analysts say domestic bonds are increasingly competing with equities as an attractive income option.
Earlier this week, the 10-year bond yield jumped to its highest level since 2011 ahead of the employment data release.
It came amid a global sell-off in long-term bond markets on concerns that higher inflation could erode bonds’ real value, prompting investors to reassess their holdings. As bond yields move in the opposite direction to prices, this means they rise as the asset is sold off.
Analysts say that with yields at elevated levels, investors can now earn more income from lending to governments and companies than from Australian equity dividends, while taking on less risk.
Speaking at a recent webinar, Challenger chief economist Jonathan Kearns noted that elevated bond yields have come at a time of underperformance by the Australian share market.
Since the start of 2026, the ASX 200 has lost 0.74 per cent compared to 11 per cent by the Japan TOPIX and 8 per cent by the S&P 500.
“The Australian equity market unfortunately hasn’t been performing as well as the Japanese market, and given the strong performance of the US market and some other economies, that means our share of the global equity market has been declining.
“We’ve come from taking up around 1.75 per cent to being closer to 1.25 per cent [of total market share]. Half of that is driven pretty much by the US just outperforming, but the other half comes from us underperforming, not only the US but other countries as well,” Kearns told attendees.
But despite relatively weak price performance, the chief economist said there are still strong returns available in Australian assets, with both equity earnings yields and bond returns elevated as yields remain high.
“Typically, equities offer a higher yield because of the risk involved in holding them, with an additional risk premium required, but at the moment you’re getting such great returns on holding bonds that it makes having a lower risk bond portfolio more attractive,” Kearns said.
He added that, given global rate dynamics and the central bank’s possible need to raise the cash rate further to contain inflation, he expects relatively high yields to persist “for some time coming.”
His comments came ahead of the April employment data release, which reinforced expectations among economists that the central bank will hold rates at least through its June meeting.
Speaking to Investor Daily, Global X senior product and investment strategist Marc Jocum agreed, adding that Australian government bonds are suddenly looking less like the “boring cousin” of the market.
“After a couple of decades where falling interest rates pushed investors into other asset classes like property, equities and private markets chasing yield, income is finally back in fixed income.
“Importantly, with inflation still running hot around 4.6 per cent, investors are increasingly focused on “real income” after inflation, and Australian dividend yields are now near multi-decade lows outside the pandemic period and may not be meeting the income needs that everyday Australians need,” Jocum said.
While mining dividends have recently rebounded, with BHP and other major miners lifting payouts amid a recovery in the commodities cycle, Jocum said investors may increasingly question whether the major banks – which are traditionally seen as dividend stocks – can sustain the same earnings growth seen over the past decade.
This is particularly true as higher funding costs, slowing credit growth and policy uncertainty begin to bite, with Commonwealth Bank last week suffering its largest one-day fall on record.
“For many investors, it raises an important question – why take share market-like volatility for a ~3-4 per cent dividend yield when high-quality bonds are now offering higher income with lower risk?”, Jocum said.
ETF flow data already suggests the answer, with April showing domestic investors locking in current income levels and the strongest inflows into Australian government bond ETFs in four years.
At the same time, Jocum conceded that while bonds are viewed as less risky than equities, they are not entirely risk-free.
“If yields keep rising, bond prices can still fall, which is why investors are diversifying across floating-rate bonds and high-quality bank credit rather than relying purely on equities for income,” he said.
While shares tend to outperform bonds over the long term, he said Global X believes both bonds and gold can serve as important “defensive cushions” in portfolios.
“But after years in the wilderness, it now appears to be bonds’ time to shine again when it comes to income.”
