Page 5 - Wealth-Adviser-Issue-123 (FWP)

ISSUE 123
OCTOBER 2025

“No bond is entirely risk-free,” observes one recent commentator—a

point frequently forgotten during bull runs or times of ultra-low
yields. While government bonds remain popular as defensive

assets, they are still exposed to interest rate and inflation risks.

risk. Yet, as highlighted in contemporary Firstlinks analysis, particularly in areas that may be vulnerable if growth slows
the storyline is different for credit-sensitive instruments. or inflation reaccelerates,” another Firstlinks article noted.
Corporate and high-yield bonds, for example, are not Diversifying across maturities and sectors is now widely
influenced solely by base rates; their pricing also responds recognised as a prudent approach. A portfolio combining
to changes in perceived credit risk and broader economic long-duration government bonds, shorter-term floating
conditions. As market conditions shift—through economic rate notes, and a measured allocation to higher-yielding
surprises, changes in monetary policy, or inflation shocks— credit can cushion shocks, capture opportunities, and adapt
these dynamics adjust the balance of risk and reward to evolving conditions. As bonds “respond to the path of
throughout the fixed income spectrum. growth, inflation and monetary policy,” the advisory role of
Understanding the variety within fixed income is vital. professional asset managers becomes increasingly valuable,
Investors may choose from cash-like short-term securities, helping retail investors calibrate their exposures as the
highly liquid government issues, investment-grade cor- environment changes.
porates, high-yield or emerging-market bonds, and even
complex structured finance. Each option comes with its Diversification and Global Positioning
own profile for risk, duration, return, and liquidity—building The 2025 landscape for fixed income investing is defined
blocks that, when thoughtfully combined, create the diverse not only by what is happening domestically, but also by
palette needed for robust portfolio construction. the forces at play around the globe. The appeal of diversi-
fication, both within Australia and through international
Risk and Reward: Balancing Returns Across markets, has never been stronger. As outlined in recent
Market Cycles Firstlinks and RBA commentary, global bonds—particularly
“No bond is entirely risk-free,” observes one recent com- those issued in emerging markets—can provide diversifi-
mentator—a point frequently forgotten during bull runs or cation benefits that offset risks concentrated in any single
times of ultra-low yields. While government bonds remain region or sector.
popular as defensive assets, they are still exposed to interest Australian government and investment-grade corporate
rate and inflation risks. As history reminded us in 2022, bonds continue to underpin many portfolios due to their
even government securities can lose value when monetary liquidity and transparency. Yet international exposures,
tightening drives yields higher or when inflation eats away carefully selected to account for currency, credit, and coun-
at real returns. try risk, provide another layer of risk mitigation. As the RBA
Credit risk is another important theme. High-yield and noted, the structural maturity and institutional resilience
emerging-market bonds may promise higher returns but of Australia’s bond market is an enduring advantage, but
carry greater risk of issuer default and can be more volatile, selective global positioning can add flexibility, potential for
especially in uncertain periods. It is not just the coupon higher returns, and broader hedging capacity.
or yield that matters; what investors must assess is the One key theme is that no single market or asset class
underlying credit quality and the risk of not being repaid in dominates across all cycles. Just as equity performance
challenging times. rotates among sectors and regions, so too does fixed income.
The interplay between bonds and the overall macro- Factors such as central bank activity, policy direction,
economic environment is pivotal. Fixed income tends to currency movements, and regional growth rates continually
respond not only to central bank actions but also to inflation shift the opportunity set. This is why advisers increasingly
expectations, global growth, and currency fluctuations. emphasise a blended approach—balancing allocations
Selectivity is crucial. “Credit spreads are narrower than aver- between sovereigns, high-quality credit, and selectively
age, suggesting limited compensation for credit risk in some higher-risk exposures at appropriate moments in the cycle.
segments. This highlights the importance of selectivity, All the while, market liquidity, transparency, and

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