Fixed Income Funds

The Australian bond market generated a return of 0.40% over the September quarter as measured by the Aust Bond Composite index. Credit markets were  again the best performing sector generating a return of just under 1% compared to a return of 0.09% from treasuries.

US tariffs remained one of the biggest themes through Q3, with several key developments shaping global trade dynamics. Initially set to expire on July 9, the 90-day tariff extension was postponed to August 1, after which President Trump outlined new tariff rates for multiple economies. Deals with the EU and Japan resulted in a moderate 15% tariff, below earlier proposals. However, Canada faced higher tariffs on non-USMCA goods, rising from 25% to 35%, while new sectoral tariffs were introduced — including 50% on copper and 100% on branded pharmaceuticals effective October 1. These measures reinforced inflationary pressures and sustained investor focus on trade policy as a critical economic driver.

In the Global bond market, weaker US labor data pushed the Federal Reserve to adopt a more dovish stance, culminating in a 25bps rate cut in September, lowering the federal funds rate to a range of 4.00–4.25%. Expectations of further easing supported bond prices broadly, with the 10-year Treasury yield down 8bps and the Bloomberg Global Aggregate Bond Index up 0.6% for the quarter. However, long-end yields in Europe rose sharply due to fiscal instability, particularly in France, where a government confidence loss and credit downgrade drove 30-year yields to post-2009 highs. Germany and the UK experienced similar upward moves, contrasting the relative stability in US long-duration bonds.

Closer to home the RBA cut cash rates by 25bpts at the August meeting to 3.60% after surprising the market by leaving them unchanged the month prior. September saw  a notable shift in tone from the RBA with the September meeting statement acknowledging a strong consumer, reliant labour market and sticker inflation following consecutive monthly surprise print. By the end of the quarter the market had removed one policy easing leaving only 35 basis points of easing priced over the coming 12 months.

Credit markets performed strongly over the quarter supported by strong equity performance, further global monetary policy easing and a strong technical backdrop. On a duration adjusted basis local credit significantly outperformed the Treasury market generating 0.92% as measured by the Bloomberg All Credit index versus 0.09% from the Bloomberg All Treasury Index. Single A and BBB credit both tightened around 15 basis points to bond to finish at 100 and 127 basis points respectively.

Portfolio outperformance was driven by a combination of our overweight to credit assets including semi govt, major and regional banks, corporates and asset backed securities. Active duration management also added performance as we maintained a neutral or long duration positions throughout the quarter.

Outlook

The RBA describes current monetary settings as restrictive. In the absence of a lift in unemployment and lower inflation we expect the cash rate to fall to 3.10%.

We continue to look for a reduction in term risk premiums, as global markets become used to policy shifts and headline news cycles. Moreover, the concern that has underpinned elevated term risk premiums are quite specific to other countries and not necessarily as relevant to Australia.

We anticipate that the yield on long-dated Australian government bonds will fluctuate around a midpoint of 4.15% for 10-year sovereign bonds over the medium term. The falling term premium is somewhat being offset by a lift in market inflation expectations ahead of Q3 inflation release, where year on year rates are forecast to rise to around 2.6%.

The Australian yield curve currently exhibits a notable degree of steepness, observed only three times in the past 25 years. The state government bond curve demonstrates an even greater level of steepness, rendering it particularly attractive. Should bond markets remain unchanged, there is further potential for capital gains for our bond funds as yields converge towards the cash rate (roll down), supplementing accrual income.

Contained volatility continues to serve as a positive factor for credit markets, due to the relationship between volatility and credit spreads. In addition, near full employment is beneficial for bank financials and residential mortgage-backed segments within the corporate sector, as it contributes to low arrears rates. This is expected to contribute to performance for our funds that maintain an overweight to credit holdings.

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The RBA describes current monetary settings as restrictive. In the absence of a lift in unemployment and lower inflation we expect the cash rate to fall to 3.10% 

Fixed Income Funds (Wholesale): Performance vs benchmark^*

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*All returns are net of fees for the Wholesale option. Find more information on these funds via the managed funds page on our website including Retail performance.

Past performance is not a reliable indicator of future returns.

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