Tim Hext: Government bonds offer value after February rate hike

Worried about rising prices? For the first time in years, Aussie government bonds are yielding enough lock in above-inflation returns for the next decade. TIM HEXT explains.

• RBA hike likely a one-off, not a new cycle
• Australian bonds offering attractive real returns
• Browse Pendal’s fixed interest funds

AUSTRALIAN government bonds are offering their best value in years as markets adjust to the Reserve Bank’s February rate hike, says Pendal’s Tim Hext.

Australian 10-year government bonds now yield around 5 per cent, with state government bonds yielding 5.5 per cent. That means investors can lock in real returns – returns above inflation – of around 2.5 per cent on risk-free assets.

Hext says this is a significant shift for retirees – who no longer need to take on equity risk to beat maintain the spending power of their savings.

“For most of the last decade, you were barely getting any returns above inflation,” says Hext, Pendal’s head of government bond strategies.

“Now you can buy a government bond – a risk-free asset – for 2.5 per cent over inflation.

“If you hold that for the next 10 years, you are guaranteed a return of inflation plus 2.5 per cent.

“You used to see super funds talk about their target being inflation plus three or four – and it was quite hard to hit that without a strong economy. Now you don’t need a strong economy to get that – and that’s a wonderful thing.”

Hext appeared alongside ANZ’s head of Australian economics, Adam Boyton, at the Pendal webinar The 2026 outlook on inflation, jobs and rates.

A speeding ticket, not a new cycle

The RBA lifted interest rates by 25 basis points in February – the first increase in rates since 2023.

But both Hext and ANZ’s Boyton suggest this may be the only rate hike this year as the early move looks likely to get inflation back under control.

Hext called the rate hike “a speeding ticket on an economy which was just going a little bit too fast” rather than the start of a new tightening cycle.

Boyton says the impact on consumers and business should show up quite quickly in the economic data.

“Even though I’m relatively optimistic on inflation, I still have no problem with what the Reserve Bank did,” says Boyton.

“It’s about getting some insurance and ensuring that inflation doesn’t get out of control.

“Because what we all miss is that inflation is a tax on everyone – and it’s a tax you cannot avoid every time you spend money in the supermarket.”

Inflation outlook improving

Still, inflation remains the dominant factor in the economic outlook.

“Number one is inflation, number two is inflation, and you can probably guess what I’m going to say for number three,” says Boyton.

“If I was to nominate one thing that will define the way people think about the economy in the first half of this year, it will be inflation – is it getting back to the band, or is it staying around its current 3.25 per cent to 4 per cent?”

Boyton expects inflation to come in lower than RBA forecasts by May, supported by moderating consumer spending and a rising Australian dollar, which helps lower import prices.

Wage growth is also slowing as public sector agreements that peaked at 7-8 per cent are now tracking toward 3.5 per cent.

“The Federal Government recently signed a 3.5 per cent agreement, and I think the RBA would be reasonably happy if they saw that across the economy,” says Hext.

“Wages … around 3.5 per cent is not going to have the same inflationary impulse,” he says.

Investment impacts

Hext says Australian government bonds have underperformed US bonds by 60-70 basis points, making them attractive on a relative basis. Global investor interest in Australian bonds is increasing significantly.

“We’re in quite a positive risk environment. You can see that by equity markets overall, and credit spreads are doing very, very well globally.

“It’s a relatively benign environment. I’m not saying that we’re going to see negative growth or poor risk markets, but I think the best is probably behind us.

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“In other words, it’s not a bad time to lock in these returns.

“The balance of risks is definitely now in your favour, given current pricing, and I would encourage investors to take advantage of that.”  

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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