The Aussie investment class still offering 5%+ yield

If inflation stays under control and within the RBA’s target band of 2-3%, yield-bearing investments may become more attractive for investors looking for lower risk returns.

And after multiple cash rate cuts, it’s fair to say that the days of 5% term deposits and savings accounts are behind us.

So where can you turn for reliable income if you’re also looking to avoid equities and dividends?

Of course, it’s worth pointing out here that no investments offer the same security or protection as a savings account or term deposit in terms of government guarantees or fixed returns.

And many of these alternatives are also offering less than 5% yield, including cash and income ETFs.

The same is true of government bonds. Australian 10-year government bonds have only offered north of 4% since October 2024 and currently offer around 4.3%.

With the global economy and markets in a state of flux, 10-year bonds are in effect a big directional bet to make right now.

Some hybrids are still offering above 5% right now, but are being phased out, which doesn’t make them a viable longer-term option.

So what’s the answer to the question at the top of this article?

It’s Australian corporate bonds.

As Betashares’ Cameron Gleeson told me recently, "Australian corporate credit tends to be very high quality and very low levels of volatility. It's still a really good asset class and good compensation for the risk you do take on by backing corporates."

It’s why Betashares have launched a range of defined income ETFs (ASX: 28BB, ASX: 29BB, ASX: 30BB) built from investment-grade corporate bonds and with a maturity date. It also lists the Australian Investment Grade Corporate Bond ETF (ASX: CRED), which offers exposure to senior, fixed-rate, investment grade Australian corporate bonds.

According to Schroders Australia’s head of multi-asset Sebastian Mullins, corporate credit is the one part of the Australian market that they’re highly positive on.

“There are parts of the Aussie credit market that are more attractive than the index. Bank Tier 2s for example, or triple B corporates,” said Mullins.

The Schroder High Yielding Credit Fund Active ETF (CBOE: HIGH) aims to beat the RBA cash rate by 2.5-3%, currently putting it above a target rate of 5%.

It aims to do this by buying Australian corporate credit and AUD-denominated global corporate credit.

“They pick the best corporates in Australia in that space and you're getting yield close to 6% for a daily liquidity investment grade portfolio that's not that far away from some private debt funds you can get to,” said Mullins.

Other funds offering access to corporate bonds include the Vanguard Australian Corporate Fixed Interest Index Fund (ASX: VACF) invests in around 400 investment-grade (BBB- or above) Australian credit securities and corporate bonds. It has returned over 7% in the last 12 months.

While corporate bonds carry a certain risk profile, defaults in Australia are exceedingly rare.

And for income investors chasing 5% yields, there’s not many other options right now.