Rising Rates, Resilient Return
What does the current rate environment mean for your bond portfolio?
Over the past several months, the Reserve Bank of Australia has raised the official cash rate three times in succession — in February, March, and again on 6 May 2026 — returning it to 4.35%, the same level reached at the peak of the post-pandemic tightening cycle. We appreciate that, for investors who hold fixed-rate investment bonds purchased in prior years, this environment can feel uncomfortable. We are writing to address that directly — and to share why, at IAM Capital Markets, we believe now represents one of the more compelling entry points for bond investors that we have seen in over a decade.
For existing investors: your investment is working as intended
If you purchased fixed-rate investment grade bonds through IAM prior to this rate cycle, your position is doing exactly what it was designed to do. The yield you locked in when you invested is the yield you will earn — guaranteed — provided you hold to maturity. Bond prices fluctuate in the secondary market as interest rates rise and fall, but these movements are unrealised only. The contractual income stream you purchased on day one remains entirely intact. At maturity, you will receive the full face value of your investment. This is the fundamental and often under-appreciated distinction between bonds and equities: the return, in an important sense, is known from the outset. Rising rates do not change that.
The opportunity for additional investment
What rising rates do is change the yield available on new investments — and here, the picture is genuinely attractive. The AU 10-year government bond yield today stands at 4.90%, now matching the November 2023 cycle high of approximately 4.95% — the highest level since 2011. For corporate and bank syndicated loan instruments — the kind IAM Capital Markets specialises in — credit margins above the risk-free rate are fairly valued, meaning total returns available to new investors today are materially higher than they were twelve, eighteen, or twenty-four months ago. For existing investors, this creates a straightforward opportunity: by adding to your position at current yield levels, you raise the average yield of your total holding. Even if your earlier investment was made at a lower rate, blending new capital in at today’s yields lifts the overall return profile of your portfolio — a strategy sophisticated fixed income investors have employed throughout every rate cycle similar to a dollar-cost averaging approach with equities.
The bond market moves before the RBA does — timing matters
This is, perhaps, the most important insight we want to share. While the RBA’s cash rate is the most visible benchmark in the market, it is a lagging instrument — it reflects decisions taken by a committee in response to data that is already published. Bond markets, by contrast, are forward looking. They continuously price in investor expectations about where the economy — and therefore rates — are headed.
The charts above illustrates this clearly using official RBA data. Australian 10-year government bond yields peaked in November 2023 at approximately 4.95% — the same month as the RBA’s final hike of that cycle. Bond yields then fell steadily through 2024 while the cash rate was held flat. The RBA did not make its first cut until February 2025 — some 15 months after the bond market had already moved. Investors who acted at or near the peak locked in high running yields and meaningful capital appreciation as bond prices rose.
We are now in a structurally similar position to that of November 2023. The RBA has delivered three consecutive hikes in 2026, and markets are pricing in further increases. But the 10-year yield at 4.90% today is approaching the prior cycle’s peak — and history shows that bond markets anticipate the turn, not confirm it. Across three Australian rate cycles, the bond market has peaked and begun its decline between ~9 and ~15 months ahead of the first rate cut. Those who wait for the RBA’s all-clear will likely find the best entry point has already passed.
What we are doing for our investors
IAM Capital Markets continues to source, structure, and manage fixed income and bank syndicated loan credit opportunities across the Australian market. In the current environment, we are seeing:
- Credit margins as fairly valued but translating directly to higher income for our investors given elevated base rates
- A growing pipeline of opportunities via bank syndicated loan credit opportunities where banks are looking to risk-share and provide floating-rate exposure
- Capital being deployed into new fixed-rate investment grade bonds at yield levels that, in our view, will look attractive in retrospect similar to what happened to 2023 vintage fixed-rate investment grade bonds
Next steps
If you would like to discuss your current portfolio, the opportunity to add to your position at today’s yields, or the broader outlook for fixed income in this environment, we welcome the conversation.
In the meantime, we encourage you to view the current environment not as a headwind to navigate, but as exactly the kind of market conditions that fixed income — structured and managed well — is built to perform in.
To discuss, call us on
1300 784 132
Get in Touch
Please contact your IAM relationship manager if you have any questions or would like to discuss.
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