Why Bonds Could Be a Smart Investment Amid Global Rate Cuts
The Reserve Bank of Australia (RBA) has cut rates three times in 2025 in line with our long-held expectations for a quarterly easing cycle. In our view, the cash rate should fall below 3% in 2026 and investors should position their portfolios for lower cash rates each quarter.
Despite equity market optimism, the RBA’s own forecasts paint a more subdued picture: inflation stabilising within its 2%–3% target band, growth only managing around 2% through 2027, and global risks still elevated. In this context, a 3.6% cash rate appears restrictive and increasingly hard to justify.
Rate cuts aren’t just a local story. Central banks across developed markets, including the U.S. Federal Reserve, are easing rates in response to subdued growth and stabilising inflation. For investors, the shift toward lower rates calls for a reassessment of income-generating strategies beyond savings accounts and term deposits. We believe the opportunity set in core bonds is as attractive as it’s been in over a decade, combining defensive characteristics with meaningful return potential.
Bond market outlook: Why investors should embrace high starting yields, steep yield curves, and elevated volatility
While tariffs, trade tensions and geopolitical uncertainty have driven volatility across global markets, core bonds have quietly delivered, posting high single-digit returns over the past year. This shouldn’t come as a surprise given that the starting yield on your portfolio today is a strong indicator of the average return you can expect over the next three to five years. With yields still elevated, it’s an opportune time to consider adding to bond allocations.
The shape of the yield curve adds to the appeal. While shorter-term bond yields have been falling, long-term rates have been rising, driving a steepening in global yield curves. This dynamic is significant for two reasons. First, despite being a year into a global easing cycle, core bond funds remain attractive because average portfolio yields are little changed. Second, steep yield curves provide a tailwind for bond returns, offering the potential for capital gains in addition to high starting yields. ; Active investors should consider positioning around the five to seven-year part of the yield curve to benefit from central bank cuts and potential capital gains through roll-down strategies.
Volatility, often seen as a risk, can also create opportunities. Active managers can take advantage of diverging global growth and inflation trends to generate returns above the market benchmark. Right now, those opportunities appear more plentiful than they’ve been in years.
The case for diversification
The global bond market, valued at close to US$150 trillion, offers a wide range of opportunities to diversify risk and seek attractive returns across developed and emerging markets.
Some investors fear a return to positive correlations between equities and bonds, especially when inflation exceeds central bank targets. But with inflation now close to target, correlations have dropped. That’s good news for portfolio construction. Correlations don’t need to be negative to be effective, just low – and right now, they are.
Fixed income opportunities as rate cuts continue
The message is clear: prepare portfolios for lower cash rates. As central banks across developed markets continue their easing cycles, global bonds present a compelling opportunity to generate resilient income and hedge portfolios against heightened volatility.
From short-term active fixed income funds to longer-duration core bond strategies, the current environment offers a wealth of options. In our view, the positive returns we’ve seen from bonds over the past year are far from over.
Explore our latest insights on fixed income strategies and how to position portfolios for 2025 here.
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