Australian Bonds Seen Outperforming in 2025

Income Asset Management (IAM) executive director of credit strategy and portfolio management Matthew Macreadie predicts Australian bonds will outperform in 2025, offering investors significant advantages over their US counterparts with the bond market there pricing in higher inflation under a Donald Trump presidency.

“Australian bonds are set to standout in 2025, offering investors significant advantages over US bonds which may fall in price given Donald Trump’s inflationary policies which have already pulled down bond prices,” Mr Macreadie said.

“With high outright yields, stable credit fundamentals, and attractive income yields, Australian bonds stand out as a compelling option for investors seeking a balanced portfolio compared to US bonds, which face more risk from potentially rising inflation.”

Mr Macreadie also anticipates a significant shift in the investment landscape as APRA slowly phases out bank hybrids securities, which have been popular with retail investors for the income they provide.

“With APRA asking banks to replace hybrid securities with more reliable forms of capital, we anticipate greater retail demand for fixed income assets. APRA’s decision is significant, particularly for retail investors who hold a large portion of the $40-billion-plus hybrid market.  The proposed regulatory changes could accelerate the shift towards bonds and other fixed income instruments,” he said.

Emphasising the importance of diversification, Mr Macreadie recommends investors consider balancing a portfolio of fixed and floating rate bonds.

“A balanced portfolio strategy that combines fixed and floating rate bonds is key to navigating the year ahead and benefitting from interest rates eventually falling in Australia. High-quality investment grade corporate bonds, such as major bank bonds and those issued by leading insurers, are a cornerstone of a robust investment portfolio. These bonds provide reliable returns and strong performance potential for investors.”

In terms of floating rate notes, these provide an effective hedge against interest rates remaining elevated and an allocation of 50% would be ideal in the current environment given interest rate uncertainty, according to Mr Macreadie.

“Investors could then pivot towards fixed-rate bonds once the rate cutting cycle starts in Australia or they could pivot now to benefit from any fall in government bond yields and rising prices once official rates are cut by the Reserve Bank,” he said.

IAM is currently introducing products to market that will allow individual investors seeking income certainty access to the broader fixed income market.

“Fixed income ETFs are a popular way to gain access to bonds. They are popular with advisers and are likely to become more so following proposed regulatory changes to hybrid securities as we anticipate greater retail demand for fixed income assets to replace the income that hybrids have offered,” he said.

“Our recent launch of two Single Bond ETFs: ETB01F and ETB01L listed on Cboe Australia, demonstrates our commitment to providing investors with sophisticated fixed income investment options,” he said.