Unlike shares, bonds are not usually the flashy upstarts of the investment world, with every move reported in the media.

But the Trump Administration’s extraordinary reshaping of global trade—marked by on-again, off-again tariffs of eye-watering proportions—thrust bond markets into the spotlight, creating turmoil not unlike that seen in share markets.

With bond markets attracting more attention than usual, it’s a good time to take a closer look at this often-overlooked asset class.

What is a bond?

A bond is a bit like an interest-only loan, and there are many different types available. A government (issuing a government bond), or sometimes a large company (issuing a corporate bond), raises money by selling bonds to investors—typically to fund infrastructure or, in the case of a company, to support expansion.

Large institutional investors often favour more complex types of bonds, while retail investors are usually more interested in fixed-rate bonds. These are commonly referred to as fixed-income investments due to the regular payments (known as coupon interest) made to the investor. The original investment amount (called the face value or principal) is repaid at an agreed date when the bond matures.

Bonds can also be traded on a secondary market by investors who choose to sell before maturity. In this case, depending on the state of the markets the economy and importantly interest rates, the bond market value may be higher or lower than its fixed face value.

The most common fixed-rate bonds, issued by governments, are generally considered more stable if held to maturity. However, all bonds are assigned a credit rating by independent agencies such as Standard & Poor’s or Moody’s to reflect their risk level.

Australia’s Commonwealth Government bonds are AAA-rated, reflecting strong fiscal management, economic stability, and a low risk of default. ⁱ State governments and quasi-government organisations such as the World Bank also issue bonds. The risk level for these can vary.

Large companies seeking to expand or launch new projects often use bonds as a way to raise capital. These corporate bonds generally pay higher interest rates but are considered slightly riskier than government-issued bonds.

How to buy bonds

Investing in bonds can help diversify a portfolio and provide a steady stream of income. However, for those with limited knowledge or experience of the market, it’s essential to seek expert professional advice—speak to our team to find out more.

For instance, if you were relying on the conventional wisdom that bond markets often rise when share markets fall, recent market activity may have come as a surprise. In the United States, the usual flight to safety—shifting from volatile shares to bonds—did not occur. For a time, both markets were falling in tandem.

Although it is possible to purchase bonds directly when there is a public offer, individual investors often face barriers due to high minimum investment thresholds.

Instead, most retail investors can gain exposure to the bond market through bond funds, bond exchange-traded funds (ETFs), or managed funds. The wide range of available funds can help diversify a portfolio by providing access to different types of bonds and markets.

It’s also important to be aware of other high-risk schemes currently being promoted. These may include property-based arrangements, manipulation of non-concessional caps, dividend stripping, limited recourse borrowing arrangements (LRBAs), personal services income diversion, asset protection strategies, the creation of multiple SMSFs, and inappropriate use of reserves.

Participating in such schemes not only risks the loss of some or all of your retirement savings but can also result in serious penalties—including disqualification as a trustee and the winding up of your SMSF.

What affects bond rates?

Interest rate movements have a direct impact on bond prices in the secondary market.

When interest rates rise, bond prices typically fall. This is because newly issued bonds offer higher returns, making existing bonds with lower interest rates less attractive and reducing demand.

Conversely, bond prices tend to rise when interest rates fall. New bonds offer lower yields, so older bonds paying higher rates become more appealing, increasing demand and driving up prices.

Bond prices are also influenced by broader economic conditions and investor sentiment.

Rising inflation can lead to falling bond prices, as it erodes the real value of fixed interest payments. On the other hand, strong economic growth may also reduce bond prices, as investors often shift their preference towards shares in pursuit of higher returns. Bonds with lower credit risk in times of crisis—such as AAA-rated government bonds—typically attract higher prices due to their perceived safety.

Bond markets may not make headlines like shares—but they can still play a vital role in a balanced portfolio generally acting as a ballast for the portfolio when equity prices fall. If you’re unsure how bonds may fit into your investment strategy or want help navigating the risks and opportunities, our team is here to help. Speak with one of our financial advisers today to explore the options best suited to your goals.