What rising interest rates mean for bonds

The Reserve Bank of Australia (RBA) raised the cash rate, its benchmark interest rate, to 4.60 per cent on 29 September 2026. It was the fourth increase this year, and yields on Australian Government bonds are close to their highest levels of 2026. For bond investors this has two sides: existing bonds have fallen in price, and new bonds and term deposits pay more than a year ago.

Government bond yields have risen through 2026

A bond's yield is the annual return it offers a buyer at today's price, if held until it matures. Daily figures in the RBA's statistical tables put the three year Australian Government bond yield at 4.15 per cent on 31 December 2025 and the ten year at 4.74 per cent. On 7 October 2026, the latest reading, they were 4.93 per cent and 5.40 per cent.

Yields were little changed in January and February, climbed in March and April, eased in May and June, then rose again from July. The three year yield reached 5.05 per cent on 15 September 2026 and the ten year 5.41 per cent on 28 September 2026, their highest levels this year.

Bond prices move mainly on what investors expect interest rates to do. The RBA has raised the cash rate in February, March, May and September, and consumer prices rose 4.0 per cent in the year to August 2026. In its statement of 29 September 2026, the RBA said it was prepared to raise the cash rate further if needed.

Rising yields lower the price of existing bonds

Most government bonds pay a fixed coupon: a regular interest payment set as a percentage of the bond's face value, the amount repaid at maturity. Because the coupon cannot change, the price adjusts when market yields move.

As a simple illustration, take a bond with a $100 face value and a fixed 5 per cent coupon, or $5 a year, bought when similar bonds yielded 5 per cent. If market yields rise to 6 per cent, a new $100 bond pays $6 a year. Buyers will then pay less than $100 for the older bond, enough less that its overall return roughly matches the market. When yields fall, the reverse happens.

How far the price moves depends largely on how long the bond has left to run. This sensitivity is measured by duration. The RBA describes it as a gauge of how strongly a price reacts to interest rates, with a shorter duration meaning a smaller move. In worked figures from the ASX guide to understanding bonds, the 5 per cent bond above would be worth about $98.14 at a 6 per cent yield with two years left. With ten years left, it would be worth about $92.56.

Price changes matter less if a bond is held to maturity

For an investor who holds a bond to maturity, these price movements do not change the payments. Coupons are paid along the way, twice a year for Treasury Bonds (the Australian Government's fixed rate bonds). The face value is repaid at maturity, provided the issuer is able to pay, and the market price tends to move back towards it as that date approaches.

Price changes matter if a bond is sold early, as the sale price could be above or below what was paid. The trade-off is that an older bond keeps paying its original coupon, which may be lower than new bonds now offer.

New bonds and term deposits pay more than a year ago

Higher yields also mean more income on offer for new money. A year ago, on 7 October 2025, the three year yield was 3.56 per cent and the ten year 4.38 per cent, against 4.93 and 5.40 per cent now.

Term deposit rates have risen too. At the end of September 2026, the RBA's measure of the average advertised one year rate at the five largest banks, for a $10,000 deposit, was 5.00 per cent. A year earlier it was 3.60 per cent.

Coupons and maturing investments can be reinvested at these higher rates. We arrange term deposits, bonds and cash accounts, and your adviser can compare what each pays across different terms.

Some bonds respond differently to rising rates

Two kinds of bond work differently from a standard fixed rate bond.

• Floating rate notes. The coupon resets, usually each quarter, at a margin above a benchmark such as the 90 day bank bill swap rate, a common measure of short term interest rates. Income rises and falls with rates, so the price usually moves much less. The main risk is the issuer's financial strength.
• Treasury Indexed Bonds. The face value of these Australian Government bonds is adjusted each quarter for movements in the Consumer Price Index (CPI), a measure of consumer prices, with a six month lag. A fixed coupon rate is paid quarterly on the adjusted amount, which is repaid at maturity. Their prices can still fall when yields rise, which matters if they are sold early.

Corporate bonds usually pay higher yields than government bonds. The extra yield compensates for credit risk, the risk that a company cannot pay interest or repay capital when due. We also offer optional capital protection on specified bonds.

To talk through what this year's rise in yields means for your bonds, term deposits and funds, and how maturing money could be reinvested, please contact your adviser.

This article is general information only. It does not take into account your objectives, financial situation or needs, and it is not a recommendation to buy, sell or hold any investment. Figures are as published on the dates given. Past performance is not a reliable indicator of future performance. Read the full risk warning