Why long term bond yields are high, and what the Reserve Bank says about it

Yields on ten year Australian Government bonds have spent much of this spring above 5 per cent, well above where they stood a year ago. On 21 October 2026 the Deputy Governor of the Reserve Bank of Australia (RBA) explained what he thinks lies behind the rise, and his answer helps show what higher yields mean for bond investors.

Ten year yields climbed through 2026 and eased in late October

A bond's yield is the annual return it offers a buyer at today's price, if held to maturity. Monthly averages published by the Federal Reserve Bank of St. Louis put the ten year Australian Government bond yield at 4.30 per cent in September 2025. In 2026 it averaged 4.98 per cent in May, 4.83 per cent in June, 4.92 per cent in July, 5.02 per cent in August and 5.28 per cent in September.

The ten year yield then eased in October. Trading Economics reported that it fell to 5.21 per cent on 23 October, a seven week low, about 0.16 percentage points lower over the month and about 1.07 percentage points higher than a year earlier. The move followed a fall in technology shares overseas, which led investors towards assets seen as lower risk. The Nasdaq index in the United States fell about 2.9 per cent on 22 October, its worst day since June, ABC News reported.

Our earlier article on rising rates and bonds, published on 9 October, described the climb in yields to their highs of late September. This article looks at the reasons the RBA gives for it.

The Deputy Governor said the rise mainly reflects higher real interest rates

Speaking at Citi's Australia and New Zealand Investment Conference in Sydney, the Deputy Governor said the moves in long term rates had been "big and pretty sharp". He listed the explanations put forward in markets, including concerns about government debt, borrowing linked to the boom in artificial intelligence, uncertainty about policy and doubts about central banks.

He pointed to one test. Break even inflation, the rate of inflation implied by the gap between yields on ordinary bonds and inflation linked bonds, has risen only a little. That suggests investors are not mainly asking for more protection against inflation. Instead, real interest rates, the return left after inflation, have gone up. He said the rise has been broad across countries and that markets do not appear to be pricing a near term default by any government.

He also said some of the rise probably reflects a higher term premium, the extra yield investors ask for to lend for longer. That tightens financial conditions in Australia to some degree, although he said the RBA's policy works mainly through the short end of the yield curve, the rates on loans of a few years or less. He added that the picture would change if the global moves became disorderly.

Higher yields mean lower prices for existing bonds and more income for new money

Most government bonds pay a fixed coupon, a regular interest payment set as a share of the bond's face value, the amount repaid at maturity. Because the coupon stays fixed, the price adjusts as yields move. When yields rise, the prices of existing bonds generally fall, and when yields fall, prices tend to rise. Longer bonds move more than shorter ones for the same change in yield.

For an investor who holds a bond to maturity, these price movements do not change the payments, provided the issuer pays. They matter if a bond is sold early, as the sale price could be above or below what was paid. For new money, a ten year yield above 5 per cent means more income on offer than a year ago.

Government bonds can be bought on the ASX

The Australian Government's fixed rate Treasury Bonds can be held through Exchange traded Treasury Bonds, which trade on the ASX like shares. The Australian Government Bonds website explains that each unit carries $100 of face value, interest is paid every six months at a fixed rate, and the price moves with interest rates in the meantime. Exchange traded Treasury Indexed Bonds work differently: their capital value is adjusted with the Consumer Price Index (CPI), and interest is paid quarterly on the adjusted amount.

The next pieces of information are close. The Australian Bureau of Statistics releases the CPI for September, including figures for the September quarter, on 28 October, and the RBA announces its next decision on the cash rate at 2.30 pm on 3 November, together with new forecasts in its Statement on Monetary Policy. The record of the Deputy Governor's remarks is on the Reserve Bank's website.

We arrange bonds alongside cash and term deposits

We arrange government and corporate bonds, term deposits, high interest cash accounts and managed funds. Your adviser can look at how bonds of different terms could fit with when you need your money and the income you would like from it, and how maturing investments could be reinvested.

If you would like to talk about what this year's rise in bond yields could mean for your investments, please get in touch with 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