Fixed-income strategies have delivered robust returns in the year to 30 June 2025, even as market volatility and policy uncertainty have tested investor confidence, according to Morningstar’s Fixed Income Sector Wrap for July.
Morningstar has found that all fixed-income categories have posted positive returns, with higher-risk segments such as private and non-investment-grade debt leading the pack.
This broad-based performance has been supported by a general tightening in credit spreads, although the trend has not been consistent throughout the year.
A temporary spike in spreads in March and April 2025, triggered by trade tensions under the Trump administration, has since reversed by June.
Furthermore, Morningstar noted that several central banks, including the Reserve Bank of Australia, have cut cash rates over the past year, which has contributed to a fall in front-end yields, and in turn has benefited returns due to interest rate duration.
However, longer-dated yields have shown divergence. Australian long-term yields have remained relatively stable year on year, while US Treasury yields at the long end have increased.
Concerns around the fiscal outlook in the United States and potential inflation from new tariffs have weighed on US bond performance, giving Australian fixed-income assets a performance edge over global peers.
Since Morningstar’s last fixed-income sector wrap in 2023, three strategies have received ratings upgrades.
In total, 54 fixed-income strategies and share classes currently hold a Morningstar Medalist Rating of gold, silver or bronze. These ratings indicate a higher level of conviction in the strategy.
The upgrades included Pendal Sustainable Aust Fixed Interest and Yarra Enhanced Income Fund being upgraded from a neutral rating to bronze, while Perpetual Diversified Income was upgraded from bronze to silver.
These have reflected greater confidence in the investment team, research capabilities or investment process.
Conversely, five strategies have been downgraded due to diminished confidence in these areas or as a result of changes to Morningstar’s ratings methodology, including Western Asset Global Bond A (silver to bronze), Pimco Diversified Fixed Interest W (gold to silver), and Schroder’s Absolute Return Inc Active ETF, Absolute Return Income Fund -WC, and its Fixed Income Fund -WC (all down from bronze to neutral).
Morningstar has also initiated coverage on 13 fixed-income strategies or share classes since its previous report.
Morningstar’s manager research analysts have primary responsibility for determining which strategies warrant qualitative ratings.
The firm takes a medium to long-term view in forming its recommendations, with updates informed by changes in investment personnel, processes and pricing.
During this same period, coverage has ceased on two strategies; Metrics Master Income Trust and Metrics Direct Income.
