Page 4 - Wealth-Adviser-Issue-123 (FWP)

ISSUE 123
OCTOBER 2025

THE EVOLVING ROLE OF BONDS

BALANCING RISK AND RETURN

IN MODERN PORTFOLIOS depositphotos.com

BY WEALTH ADVISER The Mechanics of Bonds: Income, Duration, and
Market Forces
Introduction: Bonds Beyond the Headlines At their foundation, bonds are simply agreements: one
For many years, bonds have quietly played a background party lends, another borrows, and regular coupon payments
role in Australian investment narratives, dismissed by some are set until maturity, when the principal is repaid. Yet the
as “the cardigan and slippers of the investment world.” world of fixed income is richer and more complex. Bonds
Yet, in an environment where shifting economic cycles offer two key sources of returns—income through periodic
and market volatility have become the rule rather than the interest (coupons), and capital gains or losses stemming
exception, bonds are once again stepping into focus. 2025 from price changes, which are themselves functions of
brings a renewed interest in understanding not just how prevailing market rates and changing risk appetites.
bonds work, but why they continue to matter in the ongoing A crucial concept here is duration. Duration is a measure
quest to balance risk with return. of a bond’s sensitivity to changes in interest rates. When rates
Much of the public discourse in recent years has been fall, the value of existing bonds typically rises, especially
centred on equities—companies, share prices, and the allure for those with longer durations. Conversely, rising rates can
of rapid gains. This focus often overshadows the depth and seesaw bond prices lower, particularly for those with extend-
flexibility of the fixed income universe, which encompasses ed maturities. As one recent Reserve Bank of Australia (RBA)
government bonds, corporate debt, securitised assets, speech outlined, “Because bonds pay fixed coupons, their
and more. Current market realities, including moderating prices move inversely with prevailing yields… the magnitude
inflation, changing central bank policies, and diverse yield of this effect is a function of duration, with longer-maturity
opportunities, have led many investors and advisers to bonds exhibiting greater price sensitivity.”
re-examine the enduring relevance of bonds in contempo- This inverse relationship is generally straightforward for
rary portfolios. high-quality government bonds that carry minimal credit

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