After years in the background, the Australian bond market is experiencing what Jessica Lin, head of capital markets at LGT Wealth Management, calls a “renaissance” – both in structure and investor sentiment.
Writing in a note this week, Lin traced how the domestic fixed income market – which long narrowly focused on government bonds – has broadened its scope over time.
“Today, investors can access multiple sectors, including semi-government, supranational, and corporate credit bonds, each offering distinct benefits and characteristics,” she said.
Lin highlighted that this decades-long growth has seen Australia’s non-government bond market surge from less than $1 billion in the early 1980s, to over $2 trillion today, with corporate bonds making up about half.
She attributed this rise to strong domestic demand from superannuation funds and banks, plus foreign investors drawn to Australia’s strong credit profile, stable regulation, and relatively high yields.
Jumping to the present, Lin said the medium-term trend remains supportive for the asset class as global growth slows and if inflation comes back under control – even with the Reserve Bank of Australia’s (RBA) rate hold this week keeping policy in a restrictive stance.
“Over the coming few quarters, the global macro backdrop should be relatively supportive for fixed income assets,” she said, conceding that stretching out to mid-2026, there is risk of a reflation scenario as growth momentum returns.
At the same time, Lin argued that she anticipates the impact of this will be concentrated in the US, where fiscal dynamics are “less robust, central bank independence is more at risk, and an AI-induced growth upswing has more potential to pressure cyclical inflation higher.”
Speaking to InvestorDaily, investment director at Apostle Funds Management, Harrison Lane, similarly pointed to weakening investor confidence in the US due to the uncertainty surrounding imminent Federal Reserve (Fed) cash rate cuts.
“The overall direction of policy remains toward easing, but markets are beginning to price in the end of the rate-cutting cycle,” Lane said.
Meanwhile, Lin said Australia’s fixed income market remains well-positioned, starting from a stronger fiscal position, with less challenging cyclical growth and inflation projected for 2026.
Even with Australia’s Q3 inflation coming in above the RBA’s expectations, Lin pointed out that underlying trends are still encouraging, as employment cools, wage growth shows signs of peaking, and core inflation has halved from 6 per cent in mid-2022 to 3 per cent.
Reflecting this, she said LGT forecasts that inflation will return to the RBA’s 2 to 3 per cent target band, paving the way for the cash rate to move from 3.6 per cent to around 3 per cent in the future.
Lane similarly stated that current bond pricing implies the possibility of one further rate cut, likely in Q1 or Q2 next year, after which the RBA aims to have finally brought inflation back under control.
“This should still see duration exposures perform well, with elevated yields continuing to attract both domestic and offshore investors,” Lin wrote.
Demand fuelling supply
Lin noted that the robust demand for credit markets is evident in its record levels of issuance and innovation, with Australia’s credit market now ranking among the top four globally for issuance volume.
As she explained, while investment spreads remain near historically tight levels, outright yield levels have continued to attract strong investor demand. Adding to this is the growing number of foreign participants, termed “kangaroo” issuers, whose entry in recent years has broadened market depth and liquidity.
“Their presence has further enhanced diversification within investors’ fixed income portfolios, broadening the pool of high-quality investment grade issuers available in the domestic market,” she said.
Moreover, she said another key structural development has been the rise of the corporate subordinated debt market, offering issuers equity credit while giving investors a yield premium.
Meanwhile, Lin noted the Australian Prudential Regulation Authority’s (APRA) decision to phase out bank hybrids by 2032 as an additional factor forcing investors to rethink allocations. While the move removes a familiar investment vehicle, Lin said it’s ultimately a positive development.
“While we may lament the phasing out of bank hybrids, we remain confident that this shift will prompt investors to look more broadly across the Australian fixed income landscape.
“The market offers a diverse and evolving opportunity set that continues to deliver strong fundamentals and compelling value,” she said.
Reflecting this, executive director at Income Asset Management, Cameron Winter, has directly pointed to APRA’s phasing out of the $42 billion segment as motivation for his firm to help investors rotate into “better-value” bond structures. Like Lin, he highlighted the diversity of the current market.
“People assume it’s all government bonds, but the corporate market is far more dynamic,” he said.
Lin concluded that LGT expects Australian fixed income to continue offering investors steady income, low volatility, and genuine diversification.
“In our view, this backdrop reinforces the case for maintaining an active, well-diversified allocation to Australian fixed income as a core component of long-term portfolio strategy.”
