Bond yields have been rising around the world as investors reassess the outlook for inflation, economic growth and government borrowing. The moves have been big enough to influence mortgage rates, government finances and investment portfolios.
Experienced bond investors will already be familiar with what’s been happening. For everyone else, it’s a good chance to understand why professional investors see the bond market as one of the economy’s most important barometers.
You may never have bought a bond, researched a bond ETF or checked the yield on a government bond. But there’s a good chance bonds already play a role in your investments through your superannuation account. That’s one reason the recent attention on bond markets matters.
Looking back
To understand why bonds are attracting attention now, it helps to look back.
From the early 1980s to around 2020, developed economies experienced one of the longest declines in interest rates and bond yields in modern history. Falling inflation, globalisation, technological advances and relatively stable economic conditions all helped drive yields steadily lower.
After the Global Financial Crisis and then the COVID-19 pandemic, many government bond yields fell to historic lows. In some countries, investors were even willing to accept negative yields.
That changed dramatically from 2022 as inflation surged. Central banks, including the Reserve Bank of Australia, responded by rapidly lifting interest rates. The sharp rise in yields caused short-term pain for existing bond investors. It also restored something that had been largely missing from bond markets for years: meaningful income.
Today, many commentators believe the era of ultra-low bond yields may be over. Inflation has eased from its peak, but investors are increasingly questioning whether interest rates will return to the unusually low levels of the 2010s.i
What’s happening in Australia?
Australian bond yields have moved higher during 2026 as investors responded to stronger-than-expected inflation and economic activity. Commentators aren’t confident that inflation will return quickly to the Reserve Bank’s target range.
Three-year government bond yields have moved above 5 per cent, while 10-year yields have approached levels not seen for more than a decade.ii
Higher yields affect far more than investment portfolios. Governments face higher borrowing costs, businesses pay more to raise capital, and lending rates across the economy may come under upward pressure.
The global picture
Australia isn’t alone. Around the world, governments are issuing large amounts of debt to fund spending commitments, infrastructure projects and budget deficits.
Earlier this year, the International Monetary Fund (IMF) warned about the risks of geopolitical tensions, inflation uncertainty and rising government debt.
Meanwhile, BlackRock notes that government borrowing is increasingly competing with private-sector demand for capital, helping push long-term yields higher in many countries. Its investment team believes higher yields have created attractive income opportunities, but that investors need to be more selective than in the past.
Understanding duration
“Duration” is one of the most important concepts in bond investing. It measures how sensitive a bond’s price is to changes in interest rates. Generally, the longer a bond’s duration, the more its price will move when rates change.
For example, a 10-year bond will usually move in price more than a two-year bond when market interest rates rise or fall.
This helps explain why some bonds can suffer significant short-term losses even when the issuer is financially secure. Investors often focus on credit risk, but interest-rate risk can be just as important.
The sharp rise in global yields in recent years has put duration in the spotlight. Longer-dated bonds, which benefited hugely when rates were falling, were among the hardest hit when yields moved higher.
The bottom line
After years of being overlooked, bonds are once again demanding attention, with higher yields providing more income than for much of the last decade.
At the same time, rising yields are a reminder that bonds are not risk-free, and that duration, inflation and government borrowing all matter.
Forecasts differ on the precise direction of interest rates. There does, however, appear to be broad agreement that the bond market is likely to remain a more complex environment.
How bonds work
A bond is essentially a loan made by investors to a government or company. Investors receive regular interest payments, known as coupons, and get their initial investment back when the bond matures.
The key rule to remember is that bond prices and bond yields move in opposite directions. When market interest rates rise, existing bonds with lower coupons become less attractive, so their prices fall. When interest rates fall, existing bonds typically become more valuable, so their prices rise.
Government bonds issued by the Australian Government are generally considered among the lowest-risk investments because they’re backed by the Commonwealth. Corporate bonds usually offer higher yields but carry greater credit risk.
i Fixed Income & Bond Market Outlook | BlackRock ii Rising bond yields are punching a $10 billion hole in Australian government budgets | AFR
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The information in this article is general in nature and does not take into account your objectives, financial situation or needs. Before acting on this information, consider whether it is appropriate to you, and seek personalised advice where required.
