David Roberts, Co-Portfolio Manager of the Nedgroup Investments Global Strategic Bond Fund writes that higher gilt yields, domestic politics and economics has dominated bond market chat in the UK.
Understandably so, leading many to ask if we are living through another Liz Truss moment and making many suspicious of investing in bonds.
Bond prices have fallen of late. And today may represent a good buying point for the income hungry investor. The good news for anyone wary of the UK is that there is a wide world of opportunity beyond our shore. Indeed, UK gilts make up little more than 2 per cent of the global bond index
Currently, one of my fund’s largest investments is three-year Australian sovereign debt. Not something you would find in domestic gilt or corporate bond funds. Indeed, you would struggle to find these in many strategic funds which frequently have high weightings to UK securities.
Australia occupies a somewhat rare position in the developed world. It is one of only a handful of sovereigns to hold a AAA credit rating. In an era when fiscal credibility is increasingly hard to come by, that distinction matters enormously to fixed income investors.
The country’s underlying economy is structurally supported by a robust commodities sector – a meaningful advantage when global growth concerns periodically rattle markets and investors rotate toward quality.
Importantly, the latest federal budget reinforced this picture. With the government committing to low borrowing and modest deficit targets, policymakers in Canberra appear to be reading from the same script as the Reserve Bank of Australia (RBA).
Fiscal and monetary policy are pulling in the same direction. That kind of policy consistency is increasingly rare globally, and it is precisely the sort of backdrop that tends to support sovereign creditworthiness over the medium term.
Our positioning on Australia has not been static. In fact, we were short Australian bonds until late last year – a deliberate stance taken ahead of anticipated rate hikes, with inflation concerns building, with the RBA signalling a more hawkish posture.
That caution proved well-founded. As the RBA moved rates higher in recent months to address renewed inflationary pressures, bond prices fell.
And this is where it gets interesting for active managers. Australian bonds did not just fall in absolute terms. They fell relative to other major bond markets, and by a significant margin.
Bloomberg data for the ACGB April 2029 bond versus the US 10-year Treasury tells the story clearly. The spread bottomed at -1.14 per cent in May 2025 – meaning Australian yields were more than 114 basis points above equivalent US Treasuries – before recovering to cross zero around January 2026 and reaching a high of +0.48. As of 14 May 2026, the spread sits at +0.22, reflecting the meaningful re-rating that has already taken place.
That is a substantial divergence, and it is exactly the kind of relative mispricing that creates opportunity. It is also symptomatic of a world where G7 interest rate cycles had desynchronised. For many, this is the first time in their careers they’ll have experienced this – in the QE world we got used to all central banks, most bonds rising or falling together. Today’s world of tetchy international relationships, geopolitical angst and rising conflict is much more like the late 80s or 90s when I started my career. Practical lessons learned, experience gained then may prove important in today’s world.
Earlier this year, we made the decision to move overweight Australia. The rationale was straightforward.
Bond prices had already adjusted significantly. Markets were discounting further rate hikes before the latest geopolitical uncertainties – meaning much of the bad news was already in the price. Investors were, in effect, being compensated to own these bonds.
With yields having risen sharply, Australian three-year sovereign debt was approaching an income level of close to 5 per cent per annum. For a AAA-rated government bond, that is a genuinely attractive starting point, particularly in a world still searching for quality yield.
The underperformance of Australian bonds versus peers like the US had overshot. Mean reversion, the tendency for markets to correct extreme relative moves over time. suggested the gap was ripe to close.
The AAA rating, underpinned by commodity-driven growth and credible fiscal management, provides a quality anchor that is hard to replicate elsewhere.
Global bond markets offer a universe of opportunity that extends well beyond the sovereign debt of any single country.
At any given time, relative value between markets, which is driven by divergent central bank cycles, fiscal trajectories, and economic structures can create windows for active managers to add return while maintaining or improving the overall quality of a portfolio.
Australia is a case study in that process. It is a high-quality sovereign that went through a meaningful repricing, became attractively valued on both an absolute and relative basis, and is now backed by a macro backdrop that supports further recovery.
Investors should monitor the RBA’s rate path carefully, along with global commodity markets and any shifts in Australia’s fiscal stance. But for now, investors’ position should reflect genuine conviction – and a reminder that the best opportunities in global fixed income rarely come from looking closest to home.
