The Golden Age of Australian Fixed Income

Two forces are colliding right now and together, they’re pushing income yields to their highest level in over a decade. Globally, technology companies are borrowing at record pace to build AI infrastructure. In Australia and abroad, governments are issuing more debt to fund growing budgets. Both are drawing on the same pool of investor capital at the same time, and that competition for capital is what’s pushing income yields to their highest level in over a decade. And recent tax changes mean that pressure is landing at exactly the moment fixed income’s relative tax position has improved.

The first force: The AI build-out is a credit story, not just a technology story

You don’t have to look far for proof. In August 2026, Google’s parent Alphabet came to the Australian market for the first time ever, raising A$3.9 billion in “Kangaroo” bonds – Australian-dollar debt issued by a foreign borrower – across 3-, 5-, 10- and 20-year maturities. It was the first Australian-dollar bond from a major US tech company in almost a decade, and it followed hot on the heels of a US$25 billion bond raise and an almost US$85 billion equity raise in the US, all in the same few months. Alphabet posted its first-ever negative free cash flow in the June quarter which is a clear signal that AI infrastructure spending has outgrown even one of the world’s largest cash generators.

Alphabet isn’t alone. It’s simply the highest-profile name in a much bigger wave: foreign issuers have raised around A$60 billion in Kangaroo bonds in Australia so far in 2026, up roughly 40% on 2025 and a record for the market. Globally, AI-related debt issuance is on track to approach US$570 billion for the year – nearly double 2025 – as hyperscalers, data center developers, chipmakers and utilities all compete for capital to fund the build-out.

This matters for income investors for a simple reason: when even the world’s best-capitalised companies are coming to market this often and this large, it means credit selection matters more than it has in years.

That’s the first driver pushing yields higher across investment-grade credit, high yield and structured finance.

It also means credit selection matters more than it has in years. Not every borrower in the AI financing wave carries the same risk profile, funding is increasingly flowing through private credit, joint ventures and off-balance-sheet structures where disclosure varies widely. The opportunity is real but capturing it well requires the ability to assess who’s actually borrowing, why, and on what protections.

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When capital is this abundant, the real risk isn’t missing out, it’s mistaking access to yield for genuine credit quality. The hard part is working out which borrowers in this wave are actually being paid for the risk they carry, and which are just riding the volume.

Matthew Macreadie

The second force: Government borrowing is adding to the same pressure

The same dynamic is playing out closer to home. The Australian Government’s 2026-27 Budget points to a larger funding task than markets had expected, with the Australian Office of Financial Management guiding to around $125–137 billion of Treasury Bond issuance for the year, plus an average of roughly $153 billion a year across the following three years. It’s a similar picture internationally, with governments across major economies running persistent deficits and issuing at scale to fund healthcare, defence, housing and infrastructure commitments.

That’s the second leg: government and AI-related corporate borrowing are now drawing on the same pool of investor capital, at the same time. The Reserve Bank is responding to that pressure, not creating it. Rising or higher-for-longer rates lift the floor under bond yields directly, on top of the extra premium borrowers are already paying to compete for capital.

A further tailwind: Recent tax changes just tilted the field further

The tax advantage equities and property have held over fixed income for decades is being dismantled. From 1 July 2027, the 50% CGT discount is gone, replaced by cost base indexation and a 30% minimum tax rate on gains and negative gearing is being wound back on established residential property bought after budget night. Fixed income was never propped up by a CGT discount in the first place. So, while the goalposts just moved for equities and property, they haven’t moved for fixed income. The relative case just got stronger.

Are you positioned to capture the opportunity, with the risk controls that matter?

Higher yields don’t mean chasing the highest headline rate on offer. It means being selective about who you lend to, how a deal is structured, and what protections sit behind it while still capturing the higher-yield environment these combined forces have created.

That’s the space our Income MDA is built for. By combining direct bonds and syndicated term loans in a single, professionally managed portfolio, the Income MDA is designed to give investors access to this stronger income environment while applying the credit assessment and structuring discipline that matters most when borrowing in this elevated environment.

The portfolio currently carries an indicative yield of around 8.00% p.a.^* (as at July 2026, before fees) which is well ahead of AU investment-grade credit (~6.29%) and the RBA Cash Rate (currently 4.35%). And it’s not simply a case of reaching for the highest number on offer: even after accounting for long-run historical default experience, the Income MDA’s default-adjusted yield of ~7.0% still leads both AU IG credit (~6.0–6.2%) and cash (~4.3%) by a wide margin. This means Income MDA investors are being better paid for the risk they’re taking, not just taking on more risk for a higher headline rate.

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We built this portfolio assuming rates could stay higher for longer, not fall away quickly. Keeping duration short means we’re not betting the outcome on a rate cut that may or may not come.

James Simpson

It’s also built for the interest rate environment we’re actually in, not the one investors might wish for. With modified duration of around 1.0–1.6 years, the portfolio’s short exposure to interest rate movements means its capital value is far less sensitive to further rate rises than longer-dated bonds or fixed-rate investments. This is a meaningful consideration with the RBA expected by some forecasters to hold rates higher for longer through the remainder of 2026.

Part of that positioning includes direct exposure to the wave of bank Tier 2 issuance created by the phase-out of AT1 hybrids, alongside syndicated loans for further diversification — giving investors a way to replace income they may be losing as their existing hybrids roll off, without simply shifting into lower-yielding term deposits.

Disclosure:
Jim Simpson, an IAM director, substantial shareholder and member of the IAM MDA Investment Committee, through his investment company (Quinta Pty Ltd) invested $5M in the IAM MDA on 26th August 2025, which remains invested at the time of the report. At times IAM staff and other officers may have an interest in the MDA and fixed income products included in the MDA portfolios.* Yield figures are indicative only, current as at the date noted, calculated before fees and costs, and are not a forecast, target or guarantee of future returns. Yield will change as the portfolio’s holdings and market conditions change, and is not the same as the return an investor will actually receive. Default-adjusted yield figures are illustrative, based on long-run historical default-rate proxies (S&P Global 1981–2009 averages for comparable credit tiers) rather than an Australia-specific published series, and are not a prediction of future defaults. Modified duration is a measure of interest rate sensitivity and does not remove interest rate or credit risk from the portfolio. Past performance is not a reliable indicator of future performance. This document is issued by Income Asset Management Group Limited ACN 010 653 862 (ASX: IAM) and its wholly owned subsidiaries, IAM Capital Markets Ltd ACN 111 273 048 AFSL 283119 and Trustees Australia Limited ACN 010 579 058 AFSL 260038 (together, the IAM Group). The information in this document is for general information purposes only and does not purport to contain all matters relevant to any particular financial product. It is not intended to be a recommendation, offer or invitation to purchase, sell or otherwise deal in securities or other investments, and does not express any opinion on the future or expected value of any financial product. IAM Group offers general financial product advice only and has not taken into account your objectives, financial situation or needs. Before acting on any information in this document, you should consider its appropriateness having regard to your own circumstances, read the relevant Financial Services Guide, and seek independent professional advice. An investment in corporate bonds or syndicated loans should not be compared to a bank deposit — these investments carry a greater risk of loss of some or all of an investor’s capital than a bank deposit. Forecasts and market commentary in this document are predictive in character, based on assumptions available at the time, and actual results may differ substantially. IAM Group does not guarantee the currency, accuracy or completeness of the information, some of which is sourced from third parties.