The Hunt for Real Yield: How to Outpace Inflation Without Leaving the Bond Market

Analysing inflation-linked ETFs & funds, credit spreads and global income rotations.

Between inflation and market activity, investors in fixed income have had their work cut out for them. Post the GFC, rates remained low and investors in many instances were forced to look towards higher risk assets, like equities or more recently, private markets, for yield.

Then COVID struck, pushing inflation upwards and central banks were forced to do something they hadn’t in years – lift rates to fight sticky inflation.

Aside from that unpleasant blip in the radar where bonds and equities were briefly and sharply correlated in 2022, bonds reached a new golden age offering yield close to equity performance in some instances. Inflation finally seemed under control and central banks started an easing cycle.

This all brings us to the present day.

While the easing cycle is not yet over, there are some signs that inflation may be spiking again.

The Australian print surprised the market on the upside in August, and quarterly data released this week is anticipated to come in at 3%. It’s a significant jump from the 2.1% of July 2025. It has shifted expectations for how the RBA will deal with rates. Many, like AMP, still anticipate a cut in November and final cut in early 2026, while others have muted their predictions to await 2026.

Similarly, the US print rose, though slightly below expectations and this has fuelled views that the Federal Reserve will cut rates. It was 3% in September.

Can an income-focused investor afford to stay in the bond market against this backdrop? The answer comes down to your strategic approach.

Fixed Income, Interest Rates and Inflation

The relationship between bond prices and the cash rate is typically inverse – rates rise, prices fall and vice-versa.

In an easing environment, investors will generally seek to lock-in longer dated bonds to secure higher yields. In a rising rate environment, investors might instead switch to shorter dated bonds or floating rates to capture rising yield.

You can see this strategy in action in recent ETF flows, and the US paints a particularly interesting picture.

The top gaining ETFs in the US include the iShares 0-3 month Treasury Bond ETF (this has low interest rate risk so represents investors playing it short in an uncertain market) and the Vanguard Total Bond Market ETF, while the Vanguard Intermediate-Term Corporate Bond ETF saw big outflows in keeping with a preference for longer-dated securities. The iShares 7-10 year Treasury Bond ETF (IEF) had significant inflows for September alone, with $2.6bn (this matches with a preference for longer-dated securities in the event of rate cuts).

Domestic flows have followed similar trends.

The Vanguard Global Aggregate Bond Index (Hedged) ETF (ASX: VBND) has been one of the most popular ETFs by inflows for Australian investors which invests across the globe in both government and corporate bonds, and the Vanguard Australian Fixed Interest ETF (ASX: VAF) which invests in domestic government and corporate bonds. Both are weighted towards government bonds currently.

Beyond looking at bond duration, other strategies investors might focus on include using corporate bonds over government or Treasury as these tend to offer higher yield and incorporate inflation at a faster pace, look at different parts of the capital structure, or focus on diversified high-yielding funds.

Some examples of these approaches include:

• Betashares Australian Composite Bond ETF (ASX: OZBD) which invests in a blend of Australian corporate and government bonds.
• Global X USD High Yield Bond (Currency Hedged) ETF (ASX: USHY) which invests in high yield corporate bonds, primarily in the US.
• RAM Australian Diversified Fixed Income Fund which invests across the capital structure in senior, subordinated and capital securities issued by ASX banks, financial institutions and ASX-listed companies.
• JP Morgan Global Bond Active ETF (Managed Fund) (Cboe: JPGB) which invests across global fixed income markets including government bonds, supranational, investment grade credit, structured credit and currencies.

Matching Yield to Inflation with Inflation-linked Funds

Investors who don’t want to play around with duration or switch markets, but want to beat inflation, might look at inflation-linked bonds.

The price and returns or income coupons adjust on these bonds with the inflation rate. The coupon yield is pegged to the principal value which adjusts with CPI, so for example, if you purchase an inflation-linked bond with 6% yield, it will always pay 6% based on the principal value of the bond. At maturity, the value the investor receives back will be the greater of the original principal value or the adjusted value.

These funds tend to perform well in periods when inflation surprises on the upside. They can also be less volatile compared to other assets. But the downside can be their sensitivity to rising interest rates which can offset the inflation-protection benefits. They can also underperform other bonds over the short-term when inflation is falling or below expectations.

For example, here are three funds that are inflation-linked in Australia:

• Management cost 0.18% p.a.
• Distributions: Quarterly
• Index: Bloomberg AusBond Inflation Government 0+ Yr Index
• 12-month distribution yield as at 30 September 2025 – 1.59% p.a.
• 1-year performance 2.06%
• 3-years 5.37% p.a.
• 5-year performance 0.64% p.a.

This ETF invests in Australian inflation-linked fixed income securities. The bulk is invested in Commonwealth issued inflation-linked bonds, and it also has allocations to inflation-linked bonds issued by State Treasuries across Australia.

• Management cost 0.22% p.a.
• Distributions: Quarterly
• Index: Bloomberg Global Inflation-Linked: U.S TIPS Total Return Index Hedged AUD
• 12-month distribution yield as at 30 September 2025 – 3%
• 1-year performance 2.85%
• 3-years p.a. N/a (inception 18 September 2023)
• 5-year performance N/a (inception 18 September 2023)

The ETF aims to provide exposure to a portfolio of US Treasury Inflation-Protected Securities (‘TIPS’) hedged into Australian dollars. These are bonds issued by the US Treasury where the face value and interest payments are adjusted for inflation, as measured by US CPI.

• Management cost 0.29% p.a.
• Distributions: Quarterly
• Index: Bloomberg AusBond Inflation Treasury 1+ Yr Index
• 12-month distribution yield as at 30 September 2025 – 1.65%
• 1-year performance 1.29%
• 3-years pa 5.07% p.a.
• 5-year performance 0.40% p.a.

This fund invests in high-quality inflation-linked bonds issued by the Commonwealth Government of Australia. It is allocated across maturities ranging from 1-3 years to more than 20 years. The bulk of allocations have maturities of 5 years +.

Top-performing Fixed Interest Funds of the Past Five Years

The fixed income market has shifted significantly over the past five years and it can be valuable to consider which funds have still outperformed in this space. You’ll note that the private markets feature in the top performers – these can be higher risk when compared to public markets and may be less transparent in terms of underlying holdings.

The following funds have beaten inflation, but may carry varying risks depending on their underlying holdings. All of the funds are actively managed so will carry higher management fees.

The top performing Australian fixed interest funds based on annualised five year returns

Source: Morningstar, 27 October 2025. Portfolio yield is sourced from the fund manager websites.

The top performing international fixed interest funds based on annualised five year returns

Source: Morningstar, 27 October 2025. Portfolio yield is sourced from the fund manager websites.

Inflationary Thinking and your Fixed Interest Allocation

While investors may have been forced out of fixed interest products in the past to sustain income against rising inflation, there are more options than ever to stay invested in this asset class.

You’ll need to think outside traditional forms though and taking an active approach to management – or using tailored products, be it inflation-linked, active managers or alternative types of fixed income assets – is a critical part of the process.

Fixed income remains an essential component of a diversified portfolio, and key to supporting consistent income for investors who require this, but you can’t be complacent about your selected investments. That’s true of any aspect of a portfolio though – whether you choose passive or active investments, you should always be actively involved in your strategy and asset allocation.