For those who love income, the best value is close to home – Chris Conway

Fixed income is back, but it is not the same game investors played a decade ago.

That is the message from Daintree Capital co-founders Justin Tyler and Mark Mitchell, who say the next phase for bond markets will be shaped by a mix of weakening global growth, persistent inflation pressures, and a reduced role for duration as a portfolio hedge.

The pair argue that while the United States remains the centre of the fixed income story, the dynamics have become far more complex. Labour markets are showing cracks, consumption is softening, and construction activity is rolling over. All of this points to rising downside risks. At the same time inflation is proving sticky, fuelled by services pricing and lingering tariff effects.

“We have reached a crossroads,” they say. “Central bank reticence to sacrifice growth may mean inflation accelerates again.”

Mark Mitchell Director, Portfolio Manager – Credit and Justin Tyler, Director, Portfolio Manager – Interest Rates & Currency

US cuts still coming but the old playbook is gone

Some policy support from the Federal Reserve remains likely, but the aggressive easing once expected has been priced out. Slowing job-finding rates and large payroll revisions argue for cuts, but the inflationary backdrop argues for targeted cuts rather than a full easing cycle. With political pressure threatening the Fed’s independence, however, Daintree expects the front end of the US curve to remain well supported even if inflation drifts higher.

Tariffs are another swing factor. Corporates have absorbed most of the impact thanks to strong margins, but the unwinding of pre-tariff stockpiling is dragging on export activity. Daintree believes this shift could create a more durable headwind for global growth.

China’s slowdown matters, especially for Australia

Consumer confidence in China has plunged since the property downturn and export momentum is weakening. If Beijing deploys meaningful stimulus, Australia may benefit significantly. Stronger commodity prices and improved terms of trade would support domestic credit markets and overall sovereign conditions.

Australia appears to be on a different track

Australia may be entering an early-stage upswing, with disposable incomes and business orders stabilising from low bases. While rate cuts have been pushed further out, Daintree expects a long hold period followed by modest easing in late 2026.

Duration is losing its traditional protective power

Inflation volatility has changed how duration works inside a portfolio. Traditional negative correlations between bonds and equities only hold when inflation is low and stable. In a world defined by higher government debt, reshoring trends, and the energy transition, Daintree believes we are returning to a period of positive bond equity correlation. This reduces the defensive role duration once provided.

This shift is even more challenging in the context of stretched valuations across major equity markets.

Where the value is today

The most compelling opportunities, according to Daintree, are in short-dated Australian investment-grade credit. It offers a 50 to 100 basis point pickup over similar risk in the United States and Europe. Structured credit can add further premium without sacrificing collateral quality.

“Fixed income is doing what it should. It is protecting capital, generating income, and anchoring portfolios defensively without the return sacrifice investors had to accept only a few years ago,” Tyler and Mitchell say.
How Daintree is positioned

Core
Income: around 5.5% yield, very low duration, A-minus average
rating

High
Income: around 6.5% yield, low duration, BBB average rating, 30-40% high yield

Philosophy:
preserve capital, maintain low duration, prioritise Australian dollar
credit, and maximise defensive income

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