Fixed Income – Q1 2026 Quarterly Review

 As at 31 March 2026.

Important information: This material is general information only and does not take into account any person’s objectives, financial situation, or needs. It is not a recommendation or statement of opinion about any specific financial product. Before making any investment decisions, you should consider the appropriateness of this information in light of your own circumstances, and you should seek independent professional advice.

Forward-looking statements: This material may contain forward-looking statements, including statements about expected economic conditions, interest rates, and market trends. These statements reflect our current expectations and are based on information available at the time of writing.

Market Dashboard

Policy Rates & 10-Year Sovereign Yields

Bond Index Returns & Yields

Credit Spreads

Source: Betashares, Bloomberg, RBA, Federal Reserve, ECB, BoE, BoJ, RBNZ, BoC. As at 31 March 2026.

Global Macro and Rates

The first quarter of 2026 was defined by conflict in the Middle East and the oil shock stemming from it. Both Brent and WTI crude rose over 40% following the escalation of US and Israeli military action in Iran from late February, with Brent rising above US$100 per barrel for the first time since 2022. The Bloomberg Global Treasury Index (AUD-hedged) fell 0.4% over the quarter as the index yield rose 26 basis points.

The transmission to bond markets was consistent with the textbook response to a supply-side shock. Market-implied inflation expectations rose sharply, pulling policy rate expectations higher and triggering a broad-based sell-off across sovereign curves. The energy shock arrived at a rate environment that had been broadly stable through January, with positioning skewed towards further easing from the Fed.

The Federal Reserve held the federal funds rate at 3.50–3.75% at both its January and March meetings. Two members dissented in favour of a cut in January (Miran and Waller), but by March only Miran dissented as the Committee acknowledged the surge in oil prices and PCE inflation remaining elevated at 2.8%. The March Summary of Economic Projections (SEP) revised the median 2026 Core PCE forecast up from 2.5% to 2.7%, while the median dot for the year-end fed funds rate held at 3.4%, still implying one cut by year-end. However, Chair Powell conceded the projections were of limited value given the uncertainty amid the oil shock. The market took its cue accordingly, with the December 2026 Fed Funds futures contract repricing 52 basis points higher from the start of the quarter and effectively flat to the prevailing policy rate.

Other major central banks held rates through the quarter, with the oil shock dominating the shift in tone. The ECB (deposit rate held at 2.00%) flagged “significant upside risks to inflation” by March. The Bank of England’s MPC produced its first unanimous hold since September 2021, as the four members who had voted for a cut in February reversed course. The Bank of Japan held at 0.75% (8–1), while the Bank of Canada held at 2.25%. US Treasury yields bear-flattened, with the 2-year rising 32 basis points to 3.79% and the 10-year adding 15 basis points to 4.32%. Gilts underperformed, with 10-year yields surging 44 basis points to 4.92%, reflecting the UK’s vulnerability to energy cost pass-through. JGB 10-year yields rose 29 basis points to 2.35%, continuing their structural repricing, with the lower house elections in January (that saw the Takaichi government secure a super majority) being a major source of volatility.

Domestic Macro and Rates

The Australian curve bear-flattened aggressively, with the 3-year yield rising 52 basis points to 4.65% and the 10-year adding 23 basis points to 4.97%, driven almost entirely by the repricing of near-term RBA policy expectations. Australia stood out globally as the only major jurisdiction where the central bank was actively tightening through the quarter.

The RBA delivered two 25 basis point hikes, taking the cash rate from 3.60% to 4.10%. The February hike to 3.85% was unanimous, with the Board judging that inflation had picked up materially and private demand had grown faster than anticipated. The March hike to 4.10% was more contentious (5–4), with the majority arguing a “clear commitment to returning inflation to target” was necessary as oil prices were expected to lift headline inflation toward 5% by the June quarter. The dissenters preferred to wait for clearer data on the conflict’s economic impact. The December 2026 cash rate futures contract implied 4.69% at quarter-end, up 72 basis points from the start of the quarter, equivalent to roughly two to three further hikes beyond the prevailing 4.10% cash rate. The June 2027 contract at 4.67% suggested the market expected rates to plateau near the peak rather than reverse quickly.

Global Credit Markets

Public credit markets proved resilient despite the energy and geopolitical shock, with the credit spread on the Bloomberg Global Corporate Index widening 13 basis points in Q1. US investment-grade credit spreads widened 11 basis points to 89 basis points, while US high-yield spreads widened 42 basis points to 378 basis points, a meaningful but modest move given the magnitude of the oil price shock. The widening was concentrated in the final weeks of the quarter, with the first two months characterised by continued spread compression amid buoyant risk sentiment.

US investment-grade issuance remained robust, with full-year 2026 estimates of US$2.25 trillion on track to set a record. A significant portion of the supply was driven by hyperscaler debt issuance to fund the ongoing AI infrastructure buildout, with combined capital expenditure guidance revised up to roughly US$660 billion for 2026, nearly double the 2025 level. Alphabet, Amazon, and Oracle collectively issued roughly US$114 billion during the quarter alone, already approaching the US$142 billion that the Magnificent Seven and Oracle raised across the whole of 2025. Amazon was the largest single issuer at over US$53 billion, with maturities extending out to 50 years, while Alphabet issued across the full curve including a century bond. That Amazon’s multi-tranche deals in mid-March priced comfortably despite the oil shock and widening spreads underscored the depth of investor appetite for high-quality technology credit.

The other major development in credit markets was the growing scrutiny around private credit liquidity and valuation transparency. Several prominent private credit managers were forced to cap redemptions at their quarterly limits amid a surge in withdrawal requests, with total redemption requests across the non-traded BDC landscape reaching US$13.9 billion for the quarter, of which roughly US$6.5 billion went unfulfilled (Robert A. Stanger & Co.). In the publicly traded BDC market, average discounts to NAV widened to around 20%, suggesting investors were concerned that credit portfolios will be challenged to maintain dividends in the current environment. Whilst this discount is material, this level is below prior periods of credit stress such as COVID 2020 when the average discount reached ~50%, and the GFC 2009 period when the average discount reached ~65%. In terms of realised credit stress, actual defaults remained contained, with the Cliffwater Direct Lending Index showing non-accruals at just 1.34% and trailing twelve-month realised losses of only -0.65% as at Q4 2025.

Domestic Credit

Australian credit spreads were largely unmoved. The Bloomberg AusBond Credit Index spread widened just 4 basis points to 76 basis points, having traded as tight as 66 basis points in mid-quarter before drifting wider through March. Across the Major Bank capital structure, senior unsecured FRN discount margins held flat at 71 basis points, while Tier 2 widened 10 basis points to 135 basis points and AT1 widened 12 basis points to 188 basis points. The capital structure steepened modestly, consistent with a repricing of subordinated risk in response to geopolitical uncertainty while senior bank credit remained largely unchanged. On the supply side, banks had front-loaded issuance of loss-absorbing capital through 2025, reducing urgency in the primary market and supporting secondary spreads.

Outlook

The dominant question entering Q2 is whether the oil shock proves to be a transitory price spike or the catalyst for a more sustained deterioration in the macro outlook.

While short-term inflation expectations have surged, longer-term measures remain anchored. The 5-year and 5-year/5-year forward inflation swaps in both Australia and the US have barely moved, and the crude oil futures curve is in steep backwardation, suggesting an immediate supply crunch rather than a structural repricing higher in energy. That said, a broadening of the conflict or secondary sanctions on Iranian exports could shift the balance towards a more persistent supply disruption.

In our view, the more consequential risk is that central banks, having lost credibility in 2022, over-tighten into a supply shock and amplify the second-order demand destruction that historically follows a sustained rise in energy prices. There is precedent for this. Heading into the GFC, the Fed held rates at 2% for five months in mid-2008 as oil surged above US$140, the RBA hiked to 7.25%, and the ECB under Trichet hiked in both 2008 and again into the teeth of the Eurozone sovereign debt crisis in 2011, with all these hiking cycles reversed within months. While the RBA has both the mandate and political cover to keep tightening, further hikes risk compounding demand destruction from the oil shock itself by tightening financial conditions just as household and business spending comes under pressure.

While 2022 is still fresh in memories, comparisons may be overdone. Heading into the Russian invasion of Ukraine, Australian 10-year real yields were minus 0.6% and the cash rate was at 0.10%. Policy had to move from ultra-accommodative to genuinely restrictive, producing a historically large repricing. Today, real yields on inflation-linked Commonwealth government bonds are at 2.6%, their highest level in 15 years, and the cash rate is already in neutral-to-restrictive territory. The income buffer at current yields is substantial, and the starting conditions bear no resemblance to the environment that produced the severe bond drawdown of 2022. Real rates at these levels amplify the growth headwinds, and with the unemployment rate already close to the RBA’s 4.5% NAIRU estimate, we believe the threshold for a shift in the policy calculus could be tested sooner than the market currently expects.

At a 10-year yield still around 5% and with the curve pricing two to three further hikes, we see the risk-reward for duration as increasingly attractive, though a further escalation in the conflict or persistent inflation data could delay the anticipated shift in rate expectations. The positive stock-bond correlation observed so far is consistent with the first-order response to a supply shock with growth expectations still holding up. Should growth expectations deteriorate, duration would be expected to reassert its diversification properties.

Public credit spreads remain contained for now, but the combination of elevated rate volatility, tighter financial conditions, and growing stress in some parts of private credit, in our view, supports a greater focus on quality. The hyperscaler issuance wave shows no sign of slowing and is likely to compete with rising refinancing needs from the broader corporate sector, potentially testing the market’s capacity to absorb supply at current spread levels. The wildcard remains fiscal policy; any major stimulus to counter the supply shock, or any erosion of central bank independence under the incoming Fed leadership, could ultimately break the long end and turn a transitory shock into a persistent one.

Prepared 15 April 2026.

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