In recent months, the term “bond” has been making more frequent appearances in financial
headlines. Many clients have asked me what this means for their investments or superannuation
portfolios. Let’s explore the fundamentals of bonds and how they’re connected to broader economic
forces—especially in light of interest rates, inflation, and global events like Trump-era tariffs.
What Is a Bond Yield?
A bond yield is the return an investor can expect from holding a bond. It’s usually expressed as an
annual percentage based on the bond’s face value and the income it generates.
Think of it as a financial thermometer—bond yields fluctuate in response to interest rate changes,
inflation expectations, and investor sentiment. Importantly:
- When bond prices go up, yields fall
- When bond prices fall, yields rise
Types of Bonds
Understanding the different types of bonds can help investors make more informed decisions about
how they fit into a portfolio:
- Government Bonds
Issued by national governments (like the Australian Government), these are considered among the
safest investments.
Example:
AGB 2.75% maturing in 2027
This means you’ll receive a 2.75% annual interest payment until the bond matures in 2027. - Semi-Government Bonds
Issued by state or territory governments, they carry slightly higher yields than federal government
bonds due to marginally higher risk.
Examples:
- NSW Treasury Corporation (TCorp) Bonds
- Queensland Treasury Corporation (QTC) Bonds
These are commonly used by institutional and high-net-worth investors seeking additional yield with
relatively low risk.
- Corporate Bonds
Issued by companies to raise capital. These range from low-risk (investment-grade) to high-risk
(high-yield or “junk” bonds).
Examples:
- Telstra 3.75% 2026: Investment-grade bond offering moderate risk and steady income.
- Mining exploration company bond with 8% yield: High-yield, higher risk due to uncertain
cash flow.
- Inflation-Linked Bonds
These help protect against inflation by adjusting either the principal or interest payments (or both)
in line with inflation rates, typically the Consumer Price Index (CPI).
Example:
- Treasury Indexed Bond (TIB) 1.25% 2030: Low nominal yield, but the payment increases with
inflation—helping to maintain purchasing power.
- Convertible Bonds
These are hybrid investments that start as bonds but can be converted into shares of the issuing
company under certain conditions.
Example:
- Qantas Convertible Bond: Provides interest like a bond but may convert to Qantas shares if
the share price reaches a predetermined level.
- Floating Rate Notes (FRNs)
These pay variable interest rates tied to a benchmark like the bank bill swap rate (BBSW), making
them attractive in rising interest rate environments.
Example:
- ANZ Floating Rate Note: Pays BBSW + 1.2%. If BBSW is 3%, you receive 4.2% annually.
Trump, Tariffs, and Inflation
U.S. President Donald Trump is once again influencing economic discussion with his characteristic
protectionist stance, especially regarding tariffs on imports from China and other major economies.
Historically, tariffs may shield domestic industries, but they also raise the cost of goods—contributing to higher inflation. This was evident during the 2018–2019 U.S.–China trade war, which saw prices rise in tariff-impacted sectors. The uncertainty also triggered a “flight to safety,” with investors moving funds into U.S. Treasury bonds, driving prices up and yields down.
If similar policies resurface, we may again see ripple effects across inflation, global trade confidence, and bond markets.
How Falling Interest Rates Impact Bond Yields
When central banks lower interest rates:
- New bonds offer lower yields, making existing bonds with higher yields more attractive
- This increased demand drives up prices of existing bonds, which lowers their yields
- Investors holding these bonds may enjoy capital gains, but new investors will face lower
income returns.
In Australia, the Reserve Bank (RBA) has maintained higher rates to combat inflation. However, if
global growth slows—especially in the U.S. and China—interest rate cuts could follow. This would
likely make today’s bonds with higher yields more valuable.
The Strategic Role of Bonds in a Portfolio
Bonds aren’t just defensive—they can play a strategic role in diversifying a portfolio, generating
regular income, and providing capital stability during market volatility.
That said, they’re not without risk. A clear example came in 2021 when the RBA predicted interest
rates wouldn’t rise until 2024. Many investors trusted this outlook and bought long-term bonds,
only to suffer losses when rates increased earlier than expected.
Fortunately, our clients were largely protected. We opted for short-term deposits with reputable
financial institutions, backed by the Australian Government’s $250,000 deposit guarantee—ensuring
both safety and flexibility.
Final Thoughts
In today’s volatile environment—with global trade tensions, inflation pressures, and shifting interest
rate expectations—it’s more important than ever to understand how bonds work and how they can
affect your investments. Bonds can offer balance, income, and protection, but like any investment,
they require thoughtful strategy and regular review.
If you’re unsure about your current exposure or would like to explore options in today’s evolving
market, feel free to reach out for tailored advice.
Should you require further information about Bonds and their impact on investments, please feel
free to contact Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166 to book an
obligation-free appointment.
The information in this document does not consider your personal objectives, financial situation or
needs, so you should consider its appropriateness regarding these factors before acting on it. It is
important that your personal circumstances are taken into account before making any financial
decision, and it is recommended that you seek assistance from your financial adviser.