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Strengthen Your Core with Access to Lower Cost Australian Government Bonds

Government bonds comprise a large proportion of the Australian fixed income market and forms the core of many Australian bond portfolios. We explore the relevance of this exposure to investors today through the following frequently asked questions. 

3.5 min read
Fixed Income Strategist, SPDR APAC

At 61% of the outstanding issuance of Australian bonds1, government bonds are the staple of many broad Australian bond exposures. With an average rating of AAA2, this exposure is also among the most highly rated in the world. Meanwhile, the current interest rate on this asset class is the best it has been in the past decade.3

Why Are Government Bonds Important in Portfolio Construction?

Investors generally consider government bonds to play a defensive role in their overall portfolio. In addition to its role as a potential diversifier in a portfolio containing risk assets, investors may also seek this exposure for an element of stability, income, and liquidity –  particularly when it is packaged as an exchange traded fund.    

But What About the Experience of Bond Investors in 2022?

Despite 2022 being a negative year for most developed market investment grade fixed income assets, government bonds in Australia were up 1.4%.4

Are Bonds Still Considered a Diversifying Exposure When They Are Now Positively Correlated with Stocks?

While it has been broadly observed that bonds are now tending to move in the same direction as stocks the majority of the time, an investor is potentially still better off in times of market stress to have an element of bond exposure in their portfolios. For instance, in Q2 2022 when markets reacted strongly to the beginning of policy rate hikes by the Reserve Bank of Australia (RBA), the S&P/ASX 200 Index fell 12.4%, while a hypothetical exposure of 60% S&P/ASX 200 and 40% S&P Government Bond Index fell less, by 9.0%.5 Over a longer horizon, government bonds continue to provide diversification benefits, often benefiting the broader portfolio when investors need it most. 

How Would Future Rate Hikes by the RBA Affect Performance?

Thanks to much higher yields on average, government bond returns are now more resilient against further rate hikes than any time in the past decade, with returns expected to stay positive even if rates increase by up to around 0.9%. 

How Can I Access This Exposure?

SPDR® S&P®/ASX Australian Government Bond Fund is an exchange traded fund that offers access to Australian domiciled fixed-rate government bonds, in a cost-effective and convenient way.   

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