Australian investors have long looked to dividend-paying shares for income, but higher interest rates are changing the alternatives available to them.
After more than a decade in which low rates reduced the returns available from many fixed income investments, bond yields have risen in 2026, lifting the income available.
The shift has brought an asset class often overlooked by self-directed investors back into focus, Senior Vice President, Global Wealth Management with global bond investment firm PIMCO Kanish Chugh said in a CommSec Executive Series interview.
Chugh said Australian investors had traditionally been comfortable with shares, helped by the income available from dividends and franking credits.
But a long period of unusually low interest rates had also played a role.
“When you think about low interest rate environments that we had for much of the 2010s and early 2020s, we had this environment where Australian investors weren’t getting a high rate of return should they put their cash towards a term deposit, for example,” he said.
But that environment has now changed.
Why are bonds getting another look?
Chugh said the bond yields being seen in late 2026 were high compared with much of the period since the Global Financial Crisis, but less unusual when viewed over a longer timeframe.
But those relatively elevated yields, as well as improved access to bonds for smaller investors, mean bond investing has become topical again.
Bonds have a different job to do compared to shares, Chugh said, identifying three main roles for fixed income: income, capital preservation and diversification.
“I look at it as being like a shock absorber in a car,” he said.
“It diversifies and balances out those equity shocks that you might get from a perspective of a portfolio.”
That role has long been recognised by institutional investors such as super funds, where fixed income has remained a core part of many portfolios even during periods when yields were low.
But among self-directed investors, fixed income had become more of a “forgotten asset class”, Chugh said.
Bond investing is however subject to its own risks, with returns subject to a variety of factors including interest rates, inflation, currency movements on overseas bonds and liquidity considerations.
What’s changed for everyday investors?
It isn’t only higher yields that have changed the picture. Chugh said the growth of fixed income managed funds and exchange-traded funds (ETFs) had also opened up more of the market to individual investors.
ETFs can give investors exposure to different parts of the fixed income market, from shorter-duration strategies to broader bond portfolios and investments targeting higher income.
They can also make it easier to invest outside Australia.
Chugh said Australia represented roughly 2% of the global fixed income universe, meaning offshore markets significantly expand the range of investments available.
“ETFs now take that strategy that financial advisors and institutional super funds would access and gives it to an everyday investor,” he said.
Why does a higher return mean more risk?
The wider choice also makes understanding the risks important.
Different fixed income investments can respond differently to changes in interest rates, and higher income is generally associated with lower-rated bonds or other higher-risk parts of the market.
Chugh said investors should ask questions if an investment was offering returns that seemed out of the ordinary.
“If something is offering you a higher rate of return than what the traditional market is offering or traditional core allocation is offering, there has to be a reason for that,” he said.
Over and above investment returns, larger investors also understood the function or role that they wanted bonds to play in their portfolio, helping them develop appropriate risk allocations, Chugh said.
