Market Event Update from Evidentia, 6 November 2026
This update looks at why fixed interest has had a difficult year, what the Reserve Bank of Australia’s latest decision may signal for interest rates, and where Evidentia sees the better opportunities in bonds.
Why have fixed interest investments struggled in 2026?
Fixed interest is usually the defensive part of a portfolio, yet it has had a challenging run. Persistent inflation, rising energy prices, uncertainty over how high interest rates need to go and resilient economic activity have pushed bond yields higher around the world.
Higher yields weigh on returns because of the way bonds are priced. When new bonds are issued paying more interest, existing bonds paying less become less attractive, so their prices fall. Longer-term bonds feel this most, because their lower fixed payments are locked in for longer.
In Australia, the Reserve Bank of Australia (RBA) has raised the cash rate five times in 2026, in February, March, May, September and November, in response to persistent inflation. Bond yields have also risen globally, particularly in the US.
Results have varied across fixed interest markets. Floating rate corporate bonds, whose interest payments reset as rates rise, have held up better than traditional bond funds. Returns improved in October as yields fell, but they remain modest over 12 months.
| Fixed interest returns to 31 October 2026 (%) | 1 month | 3 months | 12 months |
|---|---|---|---|
| Australian fixed interest | 1.2 | 0.1 | 0.4 |
| Australian credit (floating rate notes) | 0.4 | 1.2 | 4.8 |
| Global fixed interest (hedged to AUD) | 1.8 | 0.2 | 0.4 |
Are Australian interest rates close to their peak?
On 3 November 2026, the RBA raised the cash rate by 0.25 percentage points to 4.85%, its highest level since 2008 (Reserve Bank of Australia, Monetary Policy Decision, 3 November 2026).
There are signs the end of the tightening cycle may be getting closer. The decision was not unanimous, with six of the nine Monetary Policy Board members voting to raise rates and three preferring to hold at 4.60%.
The RBA also dropped wording from its September statement signalling it would raise rates further if needed. More increases remain possible if inflation surprises on the upside, but in Evidentia’s view the bar for another rise now looks higher.
Higher borrowing costs are flowing through to Australian households and businesses. Mortgage repayments have risen, house prices have softened and household spending is under pressure.
Australian households carry relatively high levels of debt and most mortgages are on variable rates, so each rise reaches household budgets quickly. Monetary policy also works with a lag, which means the rises already delivered will take time to fully slow the economy and bring inflation down.
The outlook is less clear in the US, where economic activity has stayed resilient. The US Federal Reserve has raised rates once in this cycle, in September 2026. Ongoing inflation pressure, heavy government borrowing and strong investment spending could keep US interest rates and bond yields higher for longer.
What could a turning point mean for bond returns?
Rising yields have been hard on recent returns, but they have also created a more attractive starting point. At the end of October 2026, the broad Australian fixed interest market, measured by the Bloomberg AusBond Composite 0+ Yr Index, offered a yield of around 5.3%. Its 10-year average is 2.9%.
This higher income gives future returns a stronger foundation and a larger buffer against further price falls. If yields stabilise, investors benefit from the higher income now on offer. If yields fall, existing bond prices rise, adding capital gains to that income.
Bond yields can also fall before the RBA starts cutting rates, because markets look ahead. Investors tend to price in slower growth, easing inflation and future rate cuts well before they happen.
October may have been an early example. Australian and US government bond yields both fell during the month, helping Australian fixed interest return 1.2% and global fixed interest return 1.8%. One month is not a trend, but it shows how quickly bond prices can respond when expectations shift.
What if the turning point is delayed?
Energy prices remain a key risk to the inflation outlook, including any further disruption linked to the conflict in the Middle East. If inflation proves more persistent than expected, markets could price in higher rates for longer and the RBA could raise rates again.
In that case, bond yields could rise further and bond prices may fall in the short term. The higher income bonds now pay would offset part of that decline.
Where does Evidentia see the best opportunities in fixed interest?
Higher starting yields have improved the outlook for fixed interest generally, but opportunities differ across markets.
Australian government bonds are Evidentia’s preferred exposure. If growth slows in 2027 and yields fall, these bonds are well placed to benefit, and they can provide valuable protection if economic conditions weaken.
Global government bonds, including US Treasuries, offer attractive income after hedging currency exposure back to Australian dollars. Greater uncertainty around US inflation, the Federal Reserve’s response and government borrowing is why Evidentia prefers Australian government bonds, although global exposure remains important for diversification.
Corporate bonds also offer attractive income, but the extra return above government bonds remains modest. Evidentia favours higher-quality borrowers and takes a more cautious approach to lower-rated companies, where the extra income does not fully compensate for the risk of default.
What does this mean for investors?
Apart from a stronger October, recent fixed interest returns have been disappointing, especially given the defensive role these investments play. The same rise in yields that weighed on performance has also improved the outlook from here.
The timing of the interest rate peak is still uncertain. Evidentia believes the balance is shifting in favour of bonds, particularly Australian government bonds, because investors are now paid well above the past decade’s average to hold high-quality bonds and slower growth could support a recovery in prices.
Fixed interest continues to play an important role in a diversified portfolio. It provides income, diversification and protection during periods of economic or share market weakness, as October showed when bonds rose while global shares fell.
At Forest Wealth, our advisers help clients across Sydney and Melbourne work out how fixed interest fits their investment and retirement plans. If you’d like to talk through your own portfolio, call us on 1800 31 41 51 or book a time with one of our advisers.
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