Bond yields often make headlines, but they also help explain changes in borrowing costs, investments and superannuation. A bond yield is the annualised return associated with a bond at its current market price. As prices change, yields change too.
Key takeaways
- Bond prices and yields generally move in opposite directions for conventional fixed-rate bonds.
- Inflation, interest-rate expectations, demand and credit risk can all affect bond yields.
- The Australian 10-year government bond yield is different from the RBA cash rate or your mortgage rate.
- Changes in bond yields can affect fixed-interest investments held inside super, but do not determine your overall super return.
What is a bond?
A bond is a type of loan. Governments and companies issue bonds to borrow money from investors. In return, they generally agree to make interest payments and repay the bond’s face value when it matures. Many bonds can be traded before maturity, so their market prices can rise or fall even if scheduled payments stay the same.
What is a bond yield?
A bond yield expresses the return associated with a bond as an annual percentage. It is not necessarily the same as the fixed coupon payment. Running yield compares annual interest payments with the current price, while yield to maturity also accounts for the repayment amount and time remaining. Government bond yields reported in the news generally refer to a yield-to-maturity measure.
Why do bond prices and yields move in opposite directions?
When the price of a conventional fixed-rate bond falls, its yield rises. When the price rises, its yield falls. If newer, comparable bonds offer higher returns, existing bonds with lower fixed payments may become less attractive, pushing their market prices down.
For a detailed explanation, see the Reserve Bank of Australia’s guide to bonds and the yield curve.
Why do bond yields rise or fall?
Bond yields respond to changing expectations about interest rates, inflation, demand and risk. Expectations of higher rates or inflation can push yields up. Stronger demand for bonds can lift their prices and lower yields. Bonds issued by less creditworthy borrowers generally offer higher yields than comparable government bonds to compensate investors for additional risk.
What matters is not just whether yields moved, but why.
What does the Australian 10-year bond yield mean?
The Australian 10-year government bond yield is a benchmark for the annualised yield on Australian Government debt with approximately 10 years remaining until maturity. It is widely used as a reference point for longer-term borrowing costs and market expectations. It is not the RBA cash rate, a savings rate or the interest rate on your home loan.
For background on government securities, see the Australian Office of Financial Management.
How do bond yields affect everyday Australians?
Home loans and borrowing
Government bond yields can influence financial-market funding costs, but not directly or immediately. Variable home loan rates are more strongly influenced by the RBA cash rate and lender pricing decisions. Fixed rates also reflect funding costs and expectations for rates over the relevant fixed period. A higher 10-year yield does not automatically mean your mortgage rate will rise.
Superannuation
Many super funds hold bonds and other fixed-interest investments. When yields rise, existing fixed-rate bonds generally fall in market value, which may affect the fixed-interest portion of a super portfolio. Over time, higher yields can also improve income from new investments. The impact on your overall super depends on your investment option and asset mix.
Want to understand what sits behind your balance? Read How is your super invested?
Shares and other investments
Higher bond yields can change how investors value shares and can increase financing costs for businesses. But shares do not always fall when yields rise: company earnings, economic growth and other factors also influence market performance.
Should you change your investments when bond yields rise?
Not necessarily. Bond yields are one signal among many. Before making changes, consider your investment timeframe, diversification, risk tolerance and broader financial goals. Short-term market movements alone may not justify switching investments.
Unsure whether your super or investment strategy still fits your goals? Speak with the PictureWealth team about your options.
Are higher bond yields good or bad?
Higher yields are not automatically good or bad. Existing fixed-rate bondholders may see market prices fall, while people buying newly issued bonds may find higher potential income. Borrowers may face higher financing costs. Bonds still carry interest-rate, credit, inflation and liquidity risks.
ASIC’s Moneysmart guide to bonds explains these risks.
Frequently asked questions
Are bond yields the same as interest rates?
Not exactly. A fixed coupon is a scheduled payment; yield reflects the return associated with the market price and, depending on the measure, other cash flows. Bond yields are influenced by interest rates but are not the same as the RBA cash rate.
Does a 5% bond yield mean a guaranteed 5% return?
No. A quoted yield to maturity is a calculation based on the current price and expected payments. Actual returns can differ if the bond is sold early or the issuer does not pay as promised.
Do rising bond yields mean my super will fall?
Not necessarily. Existing fixed-rate bonds may lose market value, but super funds can also hold shares, property, cash and other investments. Overall performance depends on the assets held and their returns.
What is the difference between a bond yield and the RBA cash rate?
The cash rate is the overnight interest-rate target set by the RBA. Bond yields are market-determined returns on debt securities over different terms, and can move in anticipation of future policy changes.
Look at the bigger picture
Bond yields help explain movements in borrowing costs, superannuation and financial markets. But no single market indicator tells you whether your current financial strategy is right for you.
Learn more in our guide to building a long-term investment strategy in Australia.
If you would like advice on your super, investments or retirement goals, get in touch with PictureWealth.
General information only. This article does not take into account your objectives, financial situation or needs and is not personal financial advice. Consider whether the information is appropriate for your circumstances and seek advice from a financial adviser before making decisions.