Australia 2H26 Bond Outlook: Waiting for the Wind to Shift

- Sticky Inflation to Keep RBA Cautious: Although headline inflation has eased, trimmed mean inflation remains above RBA's target, with persistent housing and services inflation likely to keep monetary policy restrictive.

- Housing Market Cooling, Not Collapsing: Higher borrowing costs and new tax measures are weighing on housing activity, but structural supply shortages and strong immigration should prevent a heavy correction in property prices.

- Labour Market to Gradually Ease: Proposed NDIS reforms could lift unemployment modestly over time, but the labour market is expected to remain sufficiently resilient

- Economic Growth Remains Subdued: Weak household consumption and below-trend GDP growth suggest Australia's economy continues to soften under the weight of high interest rates and cost-of-living pressures.

- RBA Likely Near the End of Its Tightening Cycle: We believe extended pause as more likely, with at most 1 more rate hike from RBA.

- Prefer High-Quality Bonds and Barbell Strategy: We continue to favour barbell strategy, preferring both short (around 1-year) and longer tenors (7 to 10-years) of the yield curve. We like defensive natured bonds, with the likes of banks, supermarket operators and regulated utilities.

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Introduction

The first half of 2026 has been anything but quiet. Global markets have navigated persistent geopolitical tensions stemming from the US–Israel–Iran conflict, a Middle East-driven energy shock, and continued optimism surrounding artificial intelligence. Against this backdrop, Australia's monetary policy has remained firmly focused on inflation, with the Reserve Bank of Australia (RBA) delivering three consecutive rate hikes that lifted the cash rate to 4.35%.

At its latest meeting, however, the RBA unanimously decided to leave the official cash rate unchanged at 4.35%, while reiterating that "inflation is still too high" and signalling that the fight against inflation is far from over.

As we enter the second half of 2026 and look ahead to the RBA's next policy decision on 11 August, the key question for investors is no longer where rates are today, but where they are headed next.

Likely to See Sticky Inflation

Australia's headline CPI eased to 4.0% y-o-y in May 2026, down from 4.6% in March, suggesting that the sharp energy-driven inflation shock is beginning to fade. However, the Reserve Bank of Australia's (RBA) preferred measure of underlying inflation, the trimmed mean CPI, unexpectedly accelerated to 3.6% y-o-y in May 2026 from 3.4% in April 2026, indicating that domestic price pressures remain broad-based and well above the RBA's 2–3% target range. While lower fuel prices have helped moderate headline inflation, the persistence of core inflation suggests that disinflation is proving slower than anticipated.

Chart 1: Headline inflation and trimmed mean inflation

Housing remains the primary source of inflationary pressure. Following the 2025 CPI basket reweighting, housing accounts for 21.4% of the CPI basket, making it the single largest component. Within the component, rental inflation continues to be supported by chronically tight housing supply, with vacancy rates across major cities remaining near historical lows, while advertised rents continue to record robust annual increases.

Table 1: CPI expenditure weight update (2025)

Group	%
Housing	21.39
Food and non-alcoholic beverages	17.44
Recreation and culture	12.74
Transport	11.45
Furnishings, household equipment & services	8.02
Health	6.73
Alcohol and tobacco	6.58
Insurance and financial services	5.58
Education	4.69
Clothing and footwear	3.25
Communication	2.13
Source: Australian Bureau of Statistics, iFAST compilations. Data as of 26 February 2025.

Table 2: National residential vacancy rate

City	May 2025 Vacancy Rate	May 2026 Vacancy Rate
Sydney	1.50%	1.50%
Melbourne	1.70%	1.60%
Brisbane	0.90%	0.90%
Perth	0.70%	0.70%
Adelaide	0.80%	0.70%
Canberra	1.50%	1.60%
Darwin	0.50%	0.30%
Hobart	0.60%	0.60%
National	1.20%	1.20%
Source: SQM Research, iFAST compilations. Data as of May 2026.

Chart 2: Advertised rents, 12 month change by capital

On top of that, Australia is also falling short in the National Housing Accord, a coordinated pact between federal government, state government and housing union to construct 1.2 million new homes over a 5-year period (July 2024 to June 2029). As of March 2026, total dwellings completed tallied to 307,635 homes, instead of the 420,000 periodic target.

There’s also the impact of increase in minimum wages by 4.75% effective 1 July 2026. While this change only applies to the lowest wage earners, this may indirectly influence other wage negotiations, particularly against a backdrop of still-tight labour market conditions and weak productivity growth.

Taken together, persistent services inflation and structural housing shortages suggest that inflationary pressures will remain sticky over the medium term. We believe inflation is likely to remain above the RBA's comfort zone for some time, reinforcing the case for a cautious and data-dependent policy stance.

Housing Market Expected to Moderate Further, But Remain Supported

Australia's housing market had already begun to moderate before the 2026–27 Federal Budget, with total new housing loan commitments declining 6.2% qoq in the March 2026 quarter amid elevated borrowing costs and affordability pressures.

Following Australia 2026-2027 Budget, auction clearance rates in July 2026 weakened noticeably across major cities, suggesting that buyer sentiment has remained cautious. The proposed 1) restrictions on negative gearing for established residential properties and 2) changes to the capital gains tax are likely to reinforce the existing moderation in housing activity by reducing the attractiveness of residential property as an investment.

Table 3: Auction rate

	Sydney	Melbourne	Canberra	Adelaide	Brisbane
7-Jul-25	70%	72%	69%	65%	56%
7-Jul-26	50%	49%	48%	40%	18%
Source: Domain, iFAST compilations. Data as of 7 July 2026.

Nonetheless, we do not expect a sharp correction in Australia's housing market. The country continues to face a structural undersupply of housing, supported by strong population growth (immigration) and years of insufficient residential construction.

As a result, while the policy changes may temper investor demand and slow house price appreciation, they are unlikely to result in a prolonged or severe decline in housing prices.

Table 4: Changes in dwelling values, as at 30 June 2026

Region	Month	Quarter	Annual	Median Value
Sydney	-1.20%	-3.20%	0.30%	$1,265,608
Melbourne	-1.00%	-2.60%	-0.90%	$808,486
Brisbane	0.30%	1.30%	17.40%	$1,118,306
Adelaide	0.00%	1.30%	11.60%	$945,868
Perth	0.70%	2.00%	23.90%	$1,046,551
Hobart	0.60%	1.40%	9.30%	$752,760
Darwin	1.40%	5.00%	19.80%	$638,187
Canberra	-0.60%	-1.30%	2.90%	$885,254
National	-0.40%	-0.70%	7.30%	$937,722
Source: Cotality, iFAST compilations. Data as of 30 June 2026.

Unemployment Rate May Trend Higher With Structural Reform in NDIS, But Unlikely to Warrant a Shift in RBA’s Monetary Policy Stance

Australia’s May unemployment rate inched down slightly to 4.4%, from April 4.5%. This is more on the tighter band from RBA’s lenses, as they are looking for more relief from services inflation.

Both employment-to-population ratio and participation rate are still healthy, indicating the resiliency in labour market conditions. Moving ahead, we may see unemployment rate trending slightly higher, as there is a proposed changes to the National Disability Insurance Scheme (NDIS) in the Australia 2026-2027 federal budget.

The National Disability Insurance Scheme (NDIS) transformed Australian welfare by giving people with disabilities individualised budgets to buy personalised care. As many caregiving roles are inherently labour-intensive, the scheme has driven significant employment growth, turning the Healthcare and Social Assistance sector into the primary engine of national job growth.

Chart 3: Total jobs, by industry

However, the proposed NDIS reforms, including up to a 50% reduction in social participation funding, a 10% cut to capacity-building supports and tighter eligibility criteria, could prompt care providers to slow hiring or even reduce their workforce. Given that healthcare and social assistance is Australia's largest job industry, weaker hiring momentum in the sector could gradually lift the national unemployment rate.

The NDIS Amendment Bill 2026 has passed the House of Representatives and is scheduled to be voted by the Senate on 14 August 2026.Nonetheless, we opine that any employment impact is expected to materialise gradually, hence it won’t be to a point to warrant a shift in RBA’s monetary policy stance.

Australia Economy Continue to Be Weak

Australia's economic growth remained subdued in 1Q26, with GDP rising just 0.3% qoq, highlighting the continued weakness in domestic demand.

Household consumption also remains soft, underscoring cautious consumer behaviour. In contributions to quarterly growth in GDP, essential spending increased by 0.8%, while discretionary spending rose by only 0.1%, indicating that households continue to prioritise necessities over discretionary purchases. Overall, the composition of spending suggests that higher interest rates and lingering cost-of-living pressures continue to weigh on consumer confidence.

Chart 4: Contributions to quarterly growth in GDP

Yields Shifted Lower Relative to Months Ago; Close to Terminal Rate

Australia's economy has continued to show signs of moderation, reducing the urgency for the Reserve Bank of Australia (RBA) to tighten monetary policy further. While core inflation remains above the RBA's 2%–3% target range, softer economic growth, cautious household spending and emerging signs of cooling in the housing market suggest that the current policy rate is somewhat restrictive.

Consequently, financial markets have shifted expectations. Interest rate futures and the sovereign yield curve now imply fewer rate hikes than they did a few months ago, reflecting growing confidence that the cash rate is close to its terminal level. This aligns with our belief that the RBA is likely to maintain an extended pause, with at most one additional hike if inflation proves sticky.

Chart 5: ASX 30 Day Interbank Cash Rate Futures

Chart 6: Australia sovereign curve

Recommendation

All considered, despite Australia yield curve has already shifted parallelly lower relative to 1 and 3 months ago, we continue to favour a barbell approach, preferring both short (around 1-year) and longer tenors (7 to 10-years) of the yield curve.

Short-dated bonds (around 1-year) offer decent carry with limited duration risk, while longer-dated bonds stand to benefit should economic growth weaken further and bond yields decline. Investors who hold over a medium-term horizon stand to benefit from additional price appreciation as bonds “roll-down” to shorter maturities along the curve.

Within the corporate bond space, we remain positive on high-quality investment-grade issuers, particularly more defensive sectors such as major banks, supermarket operators and regulated utilities, which are better positioned to withstand a softer economic environment.

Table 5: Recommended bonds

(within the short ends)

Bond	Issuer	Bond credit rating (S&P/Fitch)	Years to next call/maturity	Bond price	Yield to worst	Min/Sub investment amount
ACGB 2.750% 21Nov2027 Govt (AUD)	Australia Government	- / AAA	-/1Y4M	97.84	4.42%	1k/1k
ACGB 2.250% 21May2028 Govt (AUD)	Australia Government	- / AAA	-/1Y10M	96.14	4.46%	1k/1k
Source: Bondsupermart, iFAST compilations. Data as of 17 July 2026.

(within the long ends)

Bond	Issuer	Bond credit rating (S&P/Fitch)	Years to next call/maturity	Bond price	Yield to worst	Min/Sub investment amount
Banks
NAB 6.558% 12May2041 Corp (AUD)	National Australia Bank (NAB)	- / A-	9Y10M/ 14Y10M	102.30	6.22%	1k/1k
WSTP 5.815% 04Jun2040 Corp (AUD)	Westpac Banking Corporation (WBC)	- / A-	8Y11M/ 13Y11M	97.30	6.20%	10k/10k
ANZ 6.124% 25Jul2039 Corp (AUD)	Australia and New Zealand Banking Group (ANZ)	- / A-	8Y/ 13Y	100.15	6.10%	1k/1k
CBAAU 6.152% 27Nov2039 Corp (AUD)	Commonwealth Bank of Australia (CBA)	- / A	8Y4M/13Y4M	100.46	6.12%	200k/10k
EBIUH 5.913% 18Jun2035 Corp (AUD)	Emirates NBD Bank PJSC	- / A+	-/8Y11M	99.42	5.99%	10k/10k
BPCEGP 6.5618% 12Jun2040 Corp (AUD)*	BPCE SA	- / BBB+	8Y11M/13Y11M	99.45	6.63%	1k/1k
Supermarket chains
CGJAU 5.546% 07Oct2032 Corp (AUD)	Coles Group Treasury Pty Ltd	- / -	6Y/6Y3M	99.06	5.72%	10k/10k
WOWAU 5.910% 29Nov2034 Corp (AUD)*	Woolworths Group Limited	- / -	8Y1M/8Y4M	99.75	5.94%	1k/1k
Regulated business
ANVAU 6.134% 31May2033 Corp (AUD)	AusNet Services Holdings Pty Ltd	- / -	6Y8M/ 6Y10M	101.91	5.78%	10k/10k
AUSGF 5.946% 10Dec2035 Corp (AUD)	Ausgrid Finance Pty Ltd	- / -	9Y2M/9Y5M	98.77	6.11%	10k/10k
ENBW 5.7923% 26Feb2036 Corp (AUD)	EnBW International Finance B.V.	-/-	-/9Y7M	97.22	6.17%	200k/10k
NBNAUS 5.350% 06Mar2035 Qsov (AUD)	NBN Co Limited	-/AA+	8Y5M/8Y8M	97.89	5.65%	10k/10k
Source: Bondsupermart, iFAST compilations. Data as of 17 July 2026. *Available for trading on RMO.

  (Some additional AUD selections available for self-directed trading on RMO)

Bond	Issuer	Bond credit rating (S&P/Fitch)	Years to next call/maturity	Bond price	Yield to worst	Min/Sub investment amount
NOMURA 6.170% 16Apr2031 Corp (AUD)	Nomura Holdings	-/A-	-/4Y9M	101.70	5.75%	1k/1k
ANVAU 6.4956% 04Feb2056 Corp (AUD)	AusNet Services Holdings	-/-	9Y4M/29Y7M	98.70	6.47%	1k/1k
BACR 8.000% Perpetual Corp (AUD)	Barclays PLC	-/BBB-	5Y11M/-	102.90	7.38%	1k/1k
TCV 5.250% 15Sep2038 Govt (AUD)	Treasury Corporation of Victoria	-/AA+	-/12Y2M	95.55	5.76%	1k/1k
Source: Bondsupermart, iFAST compilations. Data as of 17 July 2026.

Currencies View

As for currencies, we expect the AUD to trade largely range-bound against the MYR, USD, and HKD in 2H26. The impact of earlier interest rate hikes and the resulting yield differential has largely been priced into the currency during 2Q26. With Australian interest rates appearing close to their terminal level, we believe this source of support for the AUD has largely diminished heading into 3Q26. In addition, export performance across key commodities such as iron ore, coal, and LNG has remained subdued, reflecting continued weakness in China’s property and construction sectors. This is likely to cap demand for the AUD and supports our neutral outlook.

In contrast, we expect SGD to slightly strengthen against the AUD in 3Q26, underpinned by the structural support from the steepening of the S$NEER policy band, which should continue to provide a favourable backdrop for the Singapore dollar.

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Declaration

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in NAB 6.558% 12May2041 Corp (AUD), WSTP 5.815% 04Jun2040 Corp (AUD), ANZ 6.124% 25Jul2039 Corp (AUD), BPCEGP 6.5618% 12Jun2040 Corp (AUD), WOWAU 5.910% 29Nov2034 Corp (AUD), ANVAU 6.134% 31May2033 Corp (AUD), NOMURA 6.170% 16Apr2031 Corp (AUD), ANVAU 6.4956% 04Feb2056 Corp (AUD), BACR 8.000% Perpetual Corp (AUD) and TCV 5.250% 15Sep2038 Govt (AUD), and the analyst who produced this report holds a NIL position in the abovementioned securities.