“Yields on fixed income are higher than equites for the first time in almost a decade [1] ,” says Perpetual’s head of credit and fixed income, Vivek Prabhu. “That means investors today can get equity-like yields but with the benefit from the lower risk profile that fixed income offers [2].” 
 

Understanding fixed income

Fixed income investments are essentially loans made by investors to governments, companies and other organisations. Government and corporate bonds and notes, as well as private credit, are all part of fixed income. 

A borrower agrees to pay interest to the investor at set intervals – and repays the loan in full at the end of the term.

Instead of taking an ownership stake in a company through shares, fixed income investors are essentially lending their money and charging interest.

Buying a government bond means lending money to the government. Buying a corporate bond means lending money to a company.

“At a time when equity valuations are looking stretched, and there’s uncertainty in the global outlook, it may make sense to take a bit of risk off the table by turning to fixed income,” says Prabhu.
 

Main features and benefits of fixed income

Fixed income investments come in many different types but share some defining characteristics.

They usually run for a fixed term – sometimes months, sometimes years. Income is paid at regular intervals, and at the end of the term the original loan (principal) is repaid (a bullet bond). 

In the case of securitised bonds (or amortising bonds), investors receive some of the principal at scheduled income payment dates, in the same way as the underlying borrowers repay both principal and interest on their home loan or car lease throughout the loan term. 

“Investors hold fixed income because it helps deliver diversification away from shares which sometimes can rapidly move up and down in value,” says Prabhu.

“In times of market uncertainty, investors may turn to fixed income for protection, which may help cushion losses elsewhere in a portfolio.”

In Prabhu’s view, “Fixed income may also provide a relatively predictable income, which may be valuable to people who rely on the income from their investments, such as retirees.”
 

Key risks of fixed income

All investments carry risk – and fixed income is no different. Despite the name, fixed income investments do not guarantee fixed returns. Companies can fail, or struggle to keep up with payments.

Governments, especially in developed markets like Australia, are much less likely to miss a payment, but their bonds can lose value quickly if general interest rates rise or if ratings agencies downgrade their view of a country’s finances.

Liquidity is also a risk – in times of market stress it can be tricky to sell at a fair price. And inflation can erode the real value of interest payments and principal over time.

Fixed income securities trade in secondary markets, which means their prices can change even if the income payments stay the same.

Bond prices tend to move in the opposite direction to interest rates. When rates rise, the market value of bonds usually falls, because new bonds are available that pay higher interest. When rates fall, existing bonds with their higher payments become more valuable.

Some bonds have floating rates, where the interest payments adjust with market benchmarks. These tend to hold their value better when rates rise, but mean future income is less certain.
 

Difference between active and passive investing in fixed income

Many investors are familiar with the difference between index funds and actively managed funds in the sharemarket – and the same choice exists in fixed income.

Passive fixed income strategies track an index, holding the same securities in the same proportions. This approach is usually lower in cost and gives investors broad exposure to the market.

An active strategy allows professional managers to make decisions about which investments to hold with the aim of either delivering better returns or protecting portfolios against broad market drawdowns – something that can be difficult for individual investors to do on their own.

Fund managers can change the mix of bonds and other securities they hold to reduce the impact of rising rates, or to capture opportunities when conditions change. 

“We’re not blindly following an index,” says Prabhu. “We construct portfolios in a risk-aware fashion.”

This flexibility is one of the main reasons some investors prefer active strategies in fixed income.

Active strategies may also open the door to higher-yielding parts of the fixed income market that indices miss – such as securitised loans and private credit - where specialist research and experience matter most.
 

Unique features

Active management has other potential advantages that are unique to fixed income. 

In shares, index weightings favour successful companies with high market capitalisations. But in fixed income, indexes concentrate exposure into the companies and governments that are most in debt.

“In our view, passive investing just isn’t well suited to fixed income,” says Prabhu.

“Index representation is driven by how much debt you are in – the bigger your debt, the bigger your representation in the index.”

Fixed income markets can also be less transparent and harder to access than share markets, because fixed income is traded over the counter (OTC) at prices negotiated between a buyer and seller, rather than exchange traded like equities. 

This means fixed income is a less efficient market, potentially providing active managers more opportunity to add value from careful research and good trade execution.

Potential benefits of using actively managed fixed income ETFs

Traditionally, fixed income has been the domain of institutional investors and super funds because most bonds trade privately (or OTC) between big dealers rather than on a public exchange.

Exchange-traded funds (ETFs) have changed this by listing diversified fixed income portfolios on the ASX, making them available through an ordinary brokerage account.

An actively managed ETF adds another layer: investors get day-to-day professional oversight inside a structure that is as easy to buy and sell as shares.

That means no application forms, lower minimum investments and settlement on a standard T+2 basis just like shares.
 

Potential risks of using actively managed fixed income ETFs

Active strategies bring additional risks to consider. Outcomes depend on the manager’s skill – which is why consistency, experience and a clear investment process are especially important.

Fees can also be higher in active strategies, which can eat into returns, and ETFs can sometimes trade above or below the net asset value (NAV) of the fund’s holdings.
 

Conclusion

Fixed income may play a useful role in a balanced portfolio – potentially delivering relatively more predictable income and capital preservation.

With fixed income yields now higher (relative to equities) than they have been in almost a decade [3], yields on fixed income investments now exceed the dividend yield on Australian shares – reversing a long-standing disadvantage for defensive assets.

The key question for investors is how best to get exposure – through a passive index-based approach or by taking an actively managed approach?
 

From ASX

Investing in Bonds on the ASX website has information on the features, benefits and risks of bonds. The free, online ASX Bonds course provides information on the basics of fixed-income investing.

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[1] Based on a comparison of yield on the Australian 10-year Government Bond to the average dividend yield from the S&P/ASX 200 Index over 10 years to 31 August 2025. Source: Bloomberg and Perpetual data.
[2] Ibid.
[3] Ibid.