As equity markets rebound from the turbulent effects of recent tariff changes, the focus subtly shifts towards the often-overlooked bond market, an important asset class in generating stable income returns.
Escape market volatility with income investments
By Victor Gugger
19 May 2025
What the benchmarks are telling us
In Australia, the RBA has now cut the cash rate by 25 basis points, bringing the target rate to 3.85%. The board’s consensus vote between a 25 or 50 basis point cut suggests further rate reductions are likely. With the current 3-month BBSW at 3.79%, the 3-year interest rate swap – which reflects fixed borrowing costs over the coming years – is around 3.35% indicating the market is pricing in at least two more cuts. In fact, most major bank economists expect three to four additional cuts over the next year, which is further boosting demand for fixed income investments.
Also, the 5-year interest rate swap, a significant benchmark for corporate bond yields, has risen from 3.59% in late April to 3.89% currently. This uptick indicates lingering concerns about inflation control, despite the RBA’s rate-cutting intentions. Consequently, new fixed income issuances are presenting attractive coupon rates.
Where the opportunities are
With the major banks having fulfilled their issuance targets for now, corporate entities are stepping into the spotlight. Companies like Worley, Aurizon, and QBE are offering bonds with coupons around 6%. In a scenario where rate cuts accumulate to 100 basis points, term deposit returns might hover between 3% and 3.5% making corporate bonds yielding 5.5% to 6%, while taking on only slightly more risk, increasingly appealing to investors.
For investors seeking stable returns, the bond market offers opportunities to add strength to your portfolio. Keeping a close watch on rate changes and corporate bond yields can help in capitalising on favourable fixed income investments in the current economic climate.
