Macro
On 28 February 2026, the United States and Israel launched coordinated aerial strikes on multiple targets in Iran, eliminating Iran’s Supreme Leader Ali Khamenei along with several top officials. This escalation has intensified global geopolitical tensions as the conflict enters its fourth week, with no clear signs of de-escalation. The sharp reduction in oil flow through the Strait of Hormuz, coupled with the shutdown of critical energy infrastructure across the Persian Gulf region, has triggered a significant spike in global energy prices. Consequently, we anticipate a widening economic divergence between net energy-exporting and net energy-importing countries.
Exhibit 1: Energy Trade Balances by Product
Source: Bank of Singapore, UN Comtrade
Australia stands out as a relatively resilient economy among global peers. While Australia is a net importer of oil and refined fuels, it is also a large net exporter of LNG and other bulk commodities. Australia, as the world's second largest exporter of coal and LNG, can benefit from the higher energy prices, thereby providing a partial offset for costlier oil imports, supporting Australia’s terms of trade and GDP growth.
Australia is also only one of the nine countries in the world with “AAA” rating from all three major credit agencies. Its top tier credit rating is underpinned by the country’s strong institutions, including highly respected independent central bank and a long-standing floating exchange-rate regime.
Exhibit 2: Government Primary Deficit
Source: Bank of Singapore, IMF
Exhibit 3: Gross and Net Debt
Source: Bank of Singapore, IMF
Australia’s fiscal position continues to remain expansionary despite strong economic growth. As a share of GDP, net debt has increased to 38.2% in 2024 from 34.7% in the early 2000s. Nevertheless, Australia’s fiscal metrics remain solid with modest public debt by international standards. Australia's gross government debt remains low at 50% of GDP in 2025, compared to 110% for advanced economies on average. The low government debt levels suggest that there will be sufficient fiscal headroom for the government to respond to economic shocks or unexpected financial challenges. Fiscal sustainability will become increasingly important given structural trends underway, and we continue to view the 2026-2027 Federal Budget that is expected to be presented in May 2026 as a key milestone.
Exhibit 4: Australia CPI Inflation
Source: Bank of Singapore, Bloomberg, ABS
On the monetary policy front, the RBA is the first DM central bank to raise interest rates this year. Since the start of 2026, the RBA has hiked rate back-to-back from 3.60% to 4.10%. Concerns over inflation ticking up above the RBA’s 2-3% target range and a positive output gap has resulted in financial market pricing in an additional 58bps of rate hike for the rest of 2026.
Exhibit 5: AUDUSD and Rate Differential
Source: Bank of Singapore, Bloomberg
For FX, we have a constructive view on the AUD. Australia’s above target inflation and resilient domestic activity have prompted a more hawkish RBA response. While investors have largely priced in further rate hikes, we think that even modest additional interest rate rises should still be supportive of the AUD through strengthened central bank credibility. Australia’s hawkish rate pricing also appears more durable than Europe’s, given the economy’s relative insulation from energy supply risk.
Diverging interest rates, elevated industrial metals prices and increased hedging by Australian superfunds (pension funds) have contributes to expectations of a stronger AUDUSD.
Fixed Income
From the start of the year through March 25, 2026, AUD-denominated corporate and financial bonds experienced smaller negative total returns than their USD-denominated equivalents. When these returns are converted into USD, the appreciation of the AUD against the USD has turned the AUD bond returns from negative to positive, resulting in outperformance relative to USD bonds.
Exhibit 6: USD IG vs AUD IG
|
USD IG |
AUD IG |
|
|
YTD total returns in local currency |
-0.53% |
-0.40% |
|
YTD total returns in USD |
-0.53% |
3.98% |
|
Amount outstanding |
USD7,842bn |
AUD157bn/ USD109bn equivalent |
|
Number of bonds |
8,701 |
298 |
|
Yield-to-Worst (%) |
5.14% |
5.87% |
|
Spread duration (yrs) |
6.72 |
4.21 |
|
Average rating |
A3 / Baa1 |
A2 / A3 |
|
Current spreads (bps) |
85 |
105 |
|
MTD spread changes (bps) |
0 |
9 |
|
YTD spread changes (bps) |
7 |
7 |
Source: Bloomberg, as of 25 March 2026
Overview of Australia bond market
The Australian bond market currently stands at approximately AUD1.9tn (including Kangaroo bonds), with 70% of the total outstanding bonds issued by sovereign entities, regional and local governments, and government agencies. Financial institutions account for 18%, supranational and development banks make up 6%, and corporates represent the remaining 6%.
Demand has been driven by domestic superannuation funds, mutual funds, banks, and increased participation from global investors. Key factors attracting international investors include Australia’s stable regulatory and macroeconomic environment, high-quality banks and corporate credits, relatively attractive yields, diversification away from the US market, and strong demand for income. This broadening of the investor base has further enhanced the depth and resilience of the Australian bond market.
Stronger demand has also fuelled supply growth in recent years, with AUD-denominated primary issuance averaging AUD180bn annually over the past three years (2023–2025), compared to an average of AUD152bn per year in the previous decade (2016–2025).
Australia sovereign yield curve
Like the US Treasury (UST) curve, the Australian sovereign bond curve has experienced bear steepening year-to-date, with front-end yields on Australian Commonwealth Government Bonds (ACGB) rising more steeply compared to those on USTs.
Exhibit 7: Front end ACGBs offer >70bps over USTs
Source: Bloomberg, as of 25 March 2026
With the market pricing in further rate hikes on rising inflation concerns, as well as recent hawkish comments from the RBA Governor, the ACGB 2Y10Y curve is now at its flattest since 2024.
Exhibit 8: Flattest 2Y10Y ACGB curve since 2024
Source: Bloomberg, as of 25 March 2026
Comparison of AUD IG and USD IG bond markets
According to Bloomberg bond indices the USD IG bond market is substantially larger than the AUD IG market.
However, at the index level, AUD IG is of much shorter duration (4.2 years vs 6.7 years for USD IG), slightly higher credit quality (average rating at “A2”/ “A3” vs “A3”/“Baa1” for USD IG) but higher yielding (Yield-to-Worst of 5.87% vs 5.14% for USD IG).
In terms of sector composition, AUD IG has a higher tilt towards Financials (65% weight in the index), while it has no representation in Healthcare, Technology and Materials.
What is the opportunity set in AUD IG?
The high interest rate environment in Australia, following successive rate hikes by the RBA, provides investors with some of the highest yields available among IG options in DM.
In the Australian Financials sector, the bank senior unsecured bonds “AA”-rated are yielding over 5% across the curve, with the 10Y bonds reaching almost 6% in yield levels. This provides an absolute yield pick-up of over 90bps-100bps over similarly rated financials papers denominated in USD.
Exhibit 9: Yield curve comparison between AUD “AA”-rated Financials vs USD “AA”-rated Financials
Source: Bloomberg, as of 25 March 2026
In the bank Tier 2 space, bonds of and above 5-years to maturity/call offer over 6% yield levels. Even short bonds in 1-3 years offer investors over 5.5% of yields. Although the USD papers offer a slight pick-up (~20bps) in yield on a currency hedged basis, an appreciating AUD currency could offset the marginal pick-up.
Exhibit 10: Tier 2 bond yields of major domestic banks in AUD terms
Note: Green dots are USD bonds and blue dots are AUD bonds of the banks. All yields converted to AUD terms.
Source: Bloomberg, as of 26 March 2026
Similarly, as shown in exhibit 11, short-dated corporate bonds of less than 5 years in tenor offer investors yields of 5.2-5.9%, depending on rating categories.
Exhibit 11: Yields of corporate bonds by ratings
Source: Bloomberg, as of 26 March 2026
In summary, the AUD IG bond market presents investors with attractive yields within the DM IG segment. Compared to US IG bonds, it is of a shorter duration, has a higher credit quality yet is higher yielding. Given the relatively flatter yield curve, we favour shorter-dated bonds over longer-dated ones in the AUD IG space.
Most Australian companies have limited direct exposure to the Middle East, as key sectors such as banks, telecom, and utilities are primarily domestically focused. However, sectors potentially affected by Middle East tensions include airlines and airports (both negatively impacted), and oil & gas (potentially positively impacted). Banks may also face risks from a weakening macroeconomic environment in New Zealand and possible deterioration in small and medium enterprise (SME) business segments.
Some downside risks to the Australian bond market includes increased volatility driven by broader risk sentiment, persistent inflation that could push RBA terminal rates higher than currently anticipated, economic and labour market deterioration, sharp declines in housing prices, currency depreciation, and bond supply indigestion leading to higher credit spreads.
The Australian equity market offers diversification benefits at a time when global portfolios face heightened volatility from an energy shock. Here, we examine the structural features that differentiate the Australian market from major global indices.
First, Australia has a lower direct dependence on imported energy, compared to Europe and parts of Asia. Its substantial domestic production of coal and liquified natural gas (LNG) has historically muted the pass-through of global price spikes to the broader economy.
Second, the sector composition of the MSCI Australia Index differs meaningfully from global benchmarks. Its higher exposure to mining and energy names allows it to benefit from higher commodity prices. At the same time, the strong presence of Financials within the index provides a domestic demand anchor. In fact, Financials and Materials are the largest sectors of the MSCI Australia Index, with the former accounting for 42% weight and the latter accounting for 24% weight.
With regards to the broader market performance, Australian equities saw decent returns in 2025, with the MSCI Australia Index delivering USD returns of 14.8%, compared to 22.9% by the MSCI All-Country World Index (MSCI ACWI) over the same period. At the outset of last year, rolling year-on-year (YoY) earnings expectations for Australia were in negative territory and some way behind the DM upswing. Weakness in mining and energy names, and a flat-lining Banks segment were the key drags. Earnings revisions, however, have turned for the better since the later part of 2025.
Since the start of the US-Israel-Iran war this year, the Energy sector has been the top performer in Australia. The Materials sector was impacted by fluctuations in gold miners’ stocks, as well as other mining companies that have a significant exposure to global economic demand, especially China. The share prices of Australian banks have been supported by rising rates and thus did not correct as much as other global banks; the RBA raised the official cash rate by 25bps to 4.1% in March 2026, marking the second consecutive increase to tackle inflation.
However, an extended period of elevated oil prices would still impact the Australian economy. While Australia is a major exporter of natural gas, it is also a major importer of oil and refined petroleum products. As such, elevated oil prices over an extended period of time present a challenge for the Australian economy. The main area of risk to banks will likely be in SME lending portfolios, with industries most impacted likely to be in Agriculture and Transport (both are heavily reliant on fuel). Second order impacts will also be felt in other parts of the lending portfolios.
Besides the level of commodity prices and the duration in which they stay elevated, the market would also look out for RBA’s rate hike trajectory depending on the broader macro environment, as this would have implications for equities as well.
Exhibit 12: Forward P/E valuation of MSCI Australia
Source: Bloomberg, Bank of Singapore
Exhibit 13: Forecasted EPS for MSCI Australia
Source: Bloomberg, Bank of Singapore
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