A tough year for high-duration bond investors: Morningstar

New analysis depicted duration as the biggest headwind for bond investors, with both Australian and global bonds labelled as the "laggards" against their peers over the 12 months to June end.

Morningstar's Fixed Income Sector Wrap 2026 highlighted the hawkish stance from the Reserve Bank of Australia (RBA) with three interest rate hikes in FY26 have placed investors of high-duration bonds on the back foot, while long-dated yields are moving higher.

Morningstar senior analyst and report author Eun Sub Kim said it was a "mixed" year for fixed income investors, noting the magnitude of the dynamics around interest rates placed "additional" pressure on the local bond market, "resulting in a poorer average return."

"Australian bonds and global bonds were notable laggards, with long-dated bond yields ending the financial year higher," Kim said.

"Resilience in growth measures and rising inflation indicators were key drivers here, reflecting the hawkish pivot of several central banks as the year progressed.

"European Central Bank also hiked by 0.25% per year to 2.25%, citing concerns around the energy shock driven by the war in the Middle East."

He noted other categories, which tend to be less dependent on duration, have performed better from a "modest" decline in credit spreads.

"However, this decline didn't occur in a straight line; credit spreads notably widened in the first quarter of 2026 on concerns around US private debt lending structures following news of Blue Owl halting quarterly redemptions from one of its private debt funds, as well as concerns around the war in the Middle East and its potential impact on global energy supply," Kim continued.

"Credit spreads subsequently reverted lower on optimism around a ceasefire and a reduction in concerns around prolonged energy-driven inflation."

Notably, Morningstar has implemented a new ratings methodology, aiming to improve transparency and ratings stability, resulting in some changes in its gradings.

Over the period, the pillar ratings for 10 strategies have been upgraded, while three strategies were downgraded, "owing to reduced confidence". Further, the coverage for MetLife Global Bond - Class A and Betashares' Australian Bank Senior Floating Rate Bond ETF have been ceased.

"We take a medium- to long-term outlook when determining qualitative recommendations. Our views about the merits of investment strategies evolve over time based on manager-specific factors, including investment-team composition, changes to the investment process, and pricing," Kim said.

"Most upgrades reflected increased confidence in investment organisations, including multiple Parent Pillar upgrades across Pimco's fixed-income lineup and upgrades for J.P. Morgan Global Bond and CFS Fixed Interest."