Understanding fixed interest performance

19 August 2022

Fixed interest assets had a bumpy ride in FY22. This was unusual, given fixed interest is generally considered a more defensive asset class, or haven, when riskier assets (such as listed shares) experience volatility.

Fixed interest securities are a type of debt investment. The asset class was impacted by an unusual combination of economic and market factors in 2022.

Key points

• A sharp rise in interest rates in FY22 drove negative returns for fixed interest assets. This is because the price of fixed interest securities has an inverse relationship with interest rates.
• Fixed interest investments were not their traditional defensive haven over the past year. The last financial year saw the unusual combination of high inflation, rising interest rates and weak economic growth. As a result, the value of both fixed interest securities and equities broadly went backwards.
• Market changes can be unsettling – but are expected at times. Make sure your super is working towards your personal retirement needs and consider speaking to a financial adviser. Remember that super is all about the long term.

Rising inflation

What is fixed interest?

A fixed interest security works like a loan. The issuer of a fixed income security, such as a government or company, is the borrower - raising money by issuing fixed interest securities. The investor lends money by investing in or purchasing the fixed income security.

Fixed interest securities typically pay periodic interest payments to investors throughout the life of the investment and the repayment of the principal amount at maturity.

Here’s an example of a $10,000 fixed rate bond with twice-yearly coupons of $250.

Sample cash flows of a fixed interest bond

The returns of fixed interest securities have 2 components:

1. the bond price, which can fluctuate; and
2. interest payments, in the form of regular coupon payments.

Fixed interest markets are the largest capital markets in the world. They play an important role in the global financial system. Any person who has bought a house and has a mortgage has benefitted from the bond market. The fixed interest asset class can also be referred to as fixed income or bonds, with the terms used interchangeably.

Some examples of fixed interest securities include Federal, State and Territory government bonds, corporate bonds, asset-backed securities, floating-rate notes and indexed securities.

Members can find out more information about the asset class in our fixed interest factsheet:

Download: Fixed Interest factsheet

Fixed interest doesn’t mean fixed return

There are times in the market and economic cycle when fixed interest returns are negative.

The Reserve Bank of Australia (RBA) lifted the nation’s official cash rate for the first time in 11 years in May 2022. It went from 0.10% to 0.35%. By August, the RBA had raised rates three more times, bringing the cash rate to 1.85%. It’s a similar story globally, where central banks have similarly raised rates around the world.

This sharp rise in interest rates has driven negative returns for fixed interest assets. This is because the price of fixed interest securities has an inverse relationship with interest rates.

When rates rise, newly issued bonds will pay higher interest and higher yields than bonds that were previously issued. That makes previously issued bonds less attractive, decreasing their value and price.

An environment of rising rates and slowing economic growth 

Fixed interest securities generally offer steady income and capital security. They also provide portfolio diversification, downside protection and lower volatility. For this reason, fixed interest is often described as a defensive asset class. Yet in FY22 this wasn’t the case.

As AustralianSuper’s Global Economist Mark Tierney notes, we’ve seen an exceptionally rare market and economic environment this past year. He explains: ‘The last financial year was particularly unusual – given the combination of both high inflation and weak economic growth. As inflation got away from central banks, they were forced to lift interest rates sharply.

‘As a result, both fixed interest and equities broadly had negative returns last financial year.'

The combination of rising rates and slowing economic growth meant that in FY22 (1 July 2021 – 30 June 2022) fixed interest securities didn’t provide the downside protection that they traditionally offered.

Navigating changing markets

Market ups and downs can be unsettling – particularly for members who invested in fixed interest seeking a more conservative investment. But fluctuations do occur across all asset classes over the long term. Investing in a diversified portfolio can help reduce volatility and build your retirement savings over time. Our investment team is prepared to navigate these changing market conditions.

If you’re concerned about changes to your balance and how that could impact your retirement plan, consider speaking to an accredited financial adviser. Speaking to an advisor can help you review your retirement goals and consider your investment options so you make the right investment choices for you¹.

For simple super advice you can visit the tools and advice section of our website.