Why Australian Investors Should be Paying Attention to US Bonds Right Now

Why US Bond Market Volatility Makes Fixed Income More Important Than Ever

Fixed income is usually seen as the quiet, unexciting corner of investment portfolios. But in 2025, that rapidly changed.

Unexpected turbulence in the US bond market has forced investors around the world to reassess their fixed income strategies, while reminding many about why bonds matter in the first place.

So why should Australian investors care about what’s happening in the United States? How do movements in US bond yields affect assets at home? And what does it mean for the balance between risk and stability in individual portfolios?

We explore.

Why the US bond market matters to Australian investors

In 2025, the US bond market has been unusually volatile, with yields on long-dated Treasuries moving sharply throughout the year.

In fact, the MOVE Index, which measures Treasury volatility, reached levels rarely seen since the 2008 financial crisis. Meanwhile, 10-year Treasury yields climbed as high as 4.8% in January before falling back below 4.2%, and 30-year yields breached 5% in May.

We believe there are four key reasons for this volatility.

1. Stubborn inflation. US inflation remained above the Federal Reserve’s 2% target. Because bond holders receive fixed payments, high inflation erodes their purchasing power, forcing investors to demand higher returns.
2. Higher interest rates. The Fed kept rates elevated for longer than many expected, directly lifting yields on newly-issued bonds.
3. Heavy government borrowing. US federal debt passed $38 trillion in October 2025, with the government now spending $1.1 trillion annually just to service it. Large fiscal deficits meant a heavy supply of new bonds coming to market, which naturally pushes yields higher. At the same time, foreign investors – historically major buyers of Treasuries – have been reducing their holdings, with China’s treasury portfolio declining from $1.3 trillion in 2013 to around $775 billion today. When supply rises and traditional buyers step back, yields also need to rise to attract new investors.
4. Mixed economic data. Throughout 2025, US economic data sent conflicting signals. Employment remained resilient while growth indicators fluctuated, making it difficult for markets to settle on a clear outlook. Bond investors repeatedly adjusted their expectations about inflation and rate cuts, contributing to sharp moves in yields.

How bond market trends influence broader market sentiment

Bond markets don’t operate in a vacuum. In fact, they’re often described as the financial system’s early warning signal. That’s because, while sharemarkets reflect optimism (or pessimism) about future growth, bond markets tend to reflect investors’ expectations about inflation, interest rates and economic risk.

When bond yields rise sharply, it usually signals that investors expect higher inflation, tighter financial conditions or increased borrowing risk. Higher yields also raise the “hurdle rate” for other investments. For instance, if bonds offer 5% returns, investors expect at least that much before taking on the additional risk of investing elsewhere.

This means rising bond yields can place pressure on share prices – and some commentators believe that high yields are an important driver of 2025’s share market growth.

When bond yields fall, the opposite often occurs. Lower yields typically signal easing inflation or a softening economic outlook, which can support sharemarket sentiment by encouraging investors back into higher-risk assets.

Bond market trends also influence investor psychology. Sudden spikes in yields or sharp moves in government bond prices can unsettle markets because they suggest investors are rapidly repricing economic risks. Even when economic data remains stable, abrupt bond market moves can shift the mood from optimism to caution very quickly.

In this way, fixed income markets do more than provide income and diversification. They help set the emotional and financial tone of the broader investment landscape.

Why fixed income remains attractive for stability and income in 2025

Many investors are rediscovering bonds in 2025 – not least because they offer the best returns in over a decade (and traditionally with significantly less risk than shares).

While 2025 has been volatile compared to most years, the US bond market is still a lot more stable than global sharemarkets. During periods of market stress in 2025, the ASX 200 experienced substantial movements. On 9 April 2025, the ASX dropped almost 2% in just one day’s trading.

Bond prices moved too, but typically by fractions of a percent. But for investors holding diversified bond portfolios, the income continued to flow regardless of price fluctuations.

Even when bond prices move, their behaviour is driven by different forces from equities. This lower correlation helps smooth overall portfolio outcomes across market cycles.

The main risk to bond returns is simply the issuer becoming insolvent – something that’s extremely unlikely in the case of the US government. This makes fixed income fundamentally different from shares, where business failures, profit warnings and competitive pressures can cause a company’s share price to fall dramatically.

For these reasons, 2025’s volatility hasn’t diminished the role of fixed income. Instead, it has highlighted the distinction between short-term price movements and the long-term income and capital certainty that sits at the heart of bond investing.

Market cycles and what investors are watching heading into 2026

Financial markets move in long cycles that progress through phases of expansion, peak, slowdown and recovery. As 2025 draws to a close, investors are focused on where the global economy now sits within that broader cycle.

Inflation has eased from earlier extremes but remains above target in many economies, including both Australia and the United States. Interest rates are also still elevated by recent standards, despite recent rate cuts.

Bond markets are sending mixed but closely watched signals. Higher yields reflect tighter financial conditions and significant government borrowing needs. Yet the fact that yields have stabilised after earlier spikes suggests growing confidence that inflation pressures may continue moderating.

As we head into 2026, investors are particularly watching three key forces:

• The pace at which inflation continues to trend lower
• The timing and scale of any interest rate cuts
• The resilience of economic growth

In past cycles, periods like this have typically led to greater differentiation between asset classes. Growth assets such as shares are more sensitive to changing rate expectations and economic momentum, while fixed income reflects shifting views on inflation, policy and economic stability.

So rather than offering a single clear signal, bond markets today are acting as a barometer of competing forces: easing inflation pressures, still-restrictive interest rates, resilient but slowing growth and elevated government borrowing – particularly in the US, the world’s largest economy.

For investors, this combination reinforces the importance of balance – and being able to withstand a range of scenarios – rather than putting all your eggs in one basket or, in this case, a single asset class.

What US bond volatility means for Australian investors

Periods of bond market volatility can feel confusing, particularly when fixed income is generally associated with stability. However, understanding these principles can help you better interpret the bond market in 2025/2026.

1. Distinguish between price and income. Bond prices can move as interest rate expectations change, but the income paid is contractual and predictable. Short-term price movements don’t affect the reliability of income payments.
2. Bond yields provide context for broader markets. Rising yields signal tighter financial conditions and higher expected returns from low-risk assets, which can temper investors’ enthusiasm for shares. Falling yields may suggest easing inflation or a softening outlook, which can support risk appetite.
3. Different assets respond differently. Bonds, shares, cash and property each react differently to changes in growth, inflation and policy. Together, those responses help investors understand where risks and opportunities may be shifting.
4. Uncertainty is normal. What changes over time is the mix of risks investors face. In periods when both bonds and shares are moving more than usual, diversification and balance matter more, not less.
5. Fixed income offers things shares cannot. This includes known income, capital certainty and lower volatility. This is particularly valuable as yields have returned to attractive levels after years of minimal returns.

In short…

Fixed income trends can help investors read the broader market environment, while understanding what those signals are saying can help navigate the kind of uncertainty we’re experiencing right now.

More than anything, however, years like 2025 reinforce the importance of maintaining a balanced, long-term investment approach – one in which bonds play exactly the stabilising and income producing role they were designed for.