Provided by Vanguard Australia
For many Australian investors, bonds are viewed as the defensive part of a portfolio – designed to generate income, reduce volatility and provide diversification alongside shares.
But with domestic fixed income remaining the dominant approach for many Australian investors, the broader bond universe is far more diverse than many may realise.
Using Vanguard’s fixed income sector scoreboard, we examine what investors can learn from the shifting winners and losers across the bond market and why diversification matters just as much within fixed income as it does within equities.
The great big world of fixed income
While business news headlines are often dominated by equity markets, the global bond market is actually larger than its equity counterpart.
Latest estimates put the size of the global fixed income market at roughly US$156 trillion, compared to around US$154 trillion for stocks.1 And in the same way investors often hear that Australia represents less than 2% of the global share market, the same is true in fixed income.2
From an Australian investor’s perspective, the bond market can broadly be broken down into several core components: Australian fixed interest, international bonds, emerging market debt, floating rate notes, and money market securities such as bank bills. These securities are issued by entities ranging from governments and municipalities to corporations and banks.
The changing winners and losers of fixed income
For many Australian investors, the prevailing approach has been to invest predominantly in domestic fixed income, which today makes up around $31 billion of the ASX ETF market, compared to roughly $9 billion for global fixed income products.3
While Australian bonds will always continue to play an important role in portfolios, the scoreboard below highlights why diversification across different parts of the bond market can matter.
Vanguard fixed interest sector scoreboard: 2010–2025
Notes: Indices used in the scoreboard: Australian Government: Bloomberg AusBond Govt 0+ Yr Index; Australian Credit: Bloomberg AusBond Credit 0+ Yr Index; Australian Floating Rate Credit: Bloomberg AusBond Credit FRN 0+ Yr Index; Australian Bank Bills: Bloomberg AusBond Bank Bill Index; Australian Composite: Bloomberg AusBond Composite 0+ Yr Index; Global Treasuries (AUD Hedged): Bloomberg Global Treasury Total Return Index Value Hedged AUD; Global High Yield (AUD Hedged): Bloomberg Global High Yield Corporate Total Return Index Hedged AUD; Emerging Markets (AUD Hedged): J.P. Morgan EMBI Global Core Hedged Index Level AUD; Global Aggregate (AUD Hedged): Bloomberg Global Aggregate Total Return Index Value Hedged AUD.
Source: Vanguard and Bloomberg
Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. The returns of an index do not represent actual investor returns as you cannot invest directly in an index.
Why does the performance change?
There are many factors that can influence the performance of bond sectors and individual securities in any given year, including:
- Yields: Higher yields can attract capital, while falling yields can boost bond prices.
- Inflation expectations: Rising inflation can reduce the real value of future bond income payments and influence interest-rate expectations.
- Credit quality: Lower-quality issuers typically offer higher yields to compensate investors for taking on additional risk.
- Capital flows: The movement of money between asset classes, sectors and countries as investors respond to changing market conditions and risk appetite.
- Duration: How sensitive a bond is to changes in interest rates. Generally, the longer the duration, the bigger the impact from rising or falling rates.
Years such as 2011 and 2014 favoured Australian government bonds, as capital flowed towards countries offering relatively attractive yields alongside the strong perceived quality of Australian sovereign debt.
By contrast, periods like 2019 saw stronger returns from higher-risk sectors such as emerging market debt and high yield corporate bonds, as investors became more comfortable taking on risk in search of higher returns.
Then came 2022, when aggressive global rate hikes triggered broad-based losses across fixed income markets. Australian floating rate credit, which adjusts with market interest rates, proved the most defensive. Similarly, Australian Bank Bills, which typically have very short maturities of around 90 to 180 days, delivered a positive return due to their lower sensitivity to rising interest rates.
And once again the leadership shifted in 2025, with Australian bonds underperforming some other fixed income sectors as interest rates remained elevated.
All of this reinforces that leadership within bonds can change from year to year – much like equity markets – but consistently predicting which sector will outperform next is extremely difficult.
Lessons for investors and the outlook
For diversified investors, the goal is not to predict next year’s best-performing bond sector. It is to recognise that different parts of fixed income are designed to behave differently, which is why diversified portfolios often include a mix of Australian and international fixed income exposures.
That diversification can help cushion weaker performance in one part of the bond market with stronger performance elsewhere.
For those looking to take a broad, diversified approach, funds such as Vanguard Australian Fixed Index ETF (VAF) and Vanguard Global Aggregate Bond Index ETF (VBND) provide access to wide-ranging Australian and global bond markets in a single investment.
Given the uncertain inflation outlook, floating rate bond ETFs like the Vanguard Australian Floating Rate Bond Index ETF (VFLT) offers lower duration exposure and less sensitivity to interest rate changes than fixed-rate bonds.
With yields now higher, a greater share of bond returns is coming from regular income, which can help support returns over time.
Sources:
1, 2. Securities Industry and Financial Markets Association (2026 Capital Markets Outlook, page 11)
Important Information: Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor and Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee of Vanguard Super (ABN 27923449966) and the issuer of Vanguard Super products.
