Why bonds look compelling in almost any scenario

If the last few years have taught investors anything, it is that traditional relationships between asset classes can break down quickly. That is particularly true in fixed income, where rising rates challenged long-held assumptions.

Now, however, the backdrop is shifting again. Yields are higher, income is more meaningful, and the role of bonds in portfolios is evolving.

So, where should investors be looking within the broad opportunity set of fixed income? To help answer that question, we reached out to Dylan Bourke from Kapstream Capital and Justin Tyler from Daintree Capital. 

Bourke highlights the appeal of “yields of 5–6% with genuine diversification,” while Tyler emphasises that “coupon income is elevated and will improve further as cash rates rise near-term.”

In this Q&A, we examine how two experienced fixed income managers are navigating this environment, where they see the most compelling opportunities, and what risks investors may be underestimating.

Fixed income regains its footing

Both Bourke and Tyler see fixed income reasserting itself as a compelling allocation, particularly in a world where macro outcomes remain uncertain.

Bourke frames the opportunity through relative value. He argues that other asset classes look increasingly stretched, noting that:

“Equities look late-cycle… in what appears to be a long dated and late-stage bull market,” while commodities remain volatile and exposed to shifting growth expectations. 

Against that backdrop, he highlights “yields of 5–6% with genuine diversification” in fixed income.

Tyler approaches the asset class through a scenario lens, but lands in a similar place. “Markets are expecting a conflict that is not long-lived,” he says, yet whether that proves correct or not, the implication for bonds is favourable. 

“If this view is correct, bond yields will fall… On the other hand, if the conflict is long-lived… yields will also fall.”

The shared takeaway is clear. Fixed income is not just offering income again, but a degree of resilience across multiple potential outcomes.

The case for short duration

There is strong alignment on where to deploy capital, with both managers favouring short-duration exposure. Bourke is explicit in his preference for short-dated investment-grade credit. 

“We think getting a yield of 5–6% for investment grade provides an attractive source of income for investors given the risk profile,” he says, pointing to a recent bank issuance of a 3yr BBB+ rated senior bond paying 1.15% credit, roughly equivalent to 5.92% yield to maturity at the time of issue. 

Tyler makes a similar case, focusing on the role of income in stabilising portfolios. “Higher coupon receipts lend resilience to portfolios, reducing the potential for sharp drawdowns,” he says.

He also highlights the flexibility that comes with shorter duration. 

“When yields are more likely to fall, there is also flexibility to add duration… so investors can benefit.”

In both cases, short duration is doing more than reducing volatility. It is preserving optionality in an environment where the path of rates remains uncertain.

Managing duration risk

Where the nuance emerges is in how each manager thinks about duration risk, particularly in the Australian context.

Bourke is more cautious on long-dated bonds locally. He warns that “many investors assume bond prices will bounce back after falls, but interest rates can trend for extended periods,” with inflation still above the RBA’s target and recent rate hikes reinforcing that risk. In his view, “Australian long bonds may face more downside than investors appreciate.”

He also points to relative opportunities offshore, noting that “Canada's core inflation has dropped to 2.3%… making their interest rate markets more attractive,” underscoring the importance of active, global positioning.

Tyler does not express the same structural concern, instead framing duration as something to manage dynamically. His emphasis is on timing and flexibility, rather than avoiding longer duration outright.

Private credit in focus

Private credit is addressed directly by Tyler, with a focus on how the asset class is perceived rather than its underlying merits.

“Private credit has seen a lot of media commentary lately, but from Daintree’s perspective, the asset class itself isn’t the issue,” he says. 

The concern, instead, is that “the apparent stability of returns often reflects pricing opacity rather than true economic resilience.”

That can lead to mismatched expectations, particularly around liquidity. Investors, he warns, may assume access to capital that is not always there in stressed environments.

While Bourke does not comment explicitly, his focus on liquid, investment-grade bonds offering “genuine diversification” highlights an alternative path for investors prioritising transparency and flexibility.

Portfolio construction in a new regime

Taken together, both perspectives point to a shift in how fixed income should be used within portfolios.

Bourke leans into high-quality, short-dated credit as a way to capture attractive income while limiting exposure to inflation and rate volatility. Tyler places greater emphasis on the role of fixed income across different macro scenarios, with income and flexibility as key pillars.

The common ground is that bonds are no longer a passive allocation. In a market defined by uncertainty, they offer both income and adaptability, provided investors are selective about where and how they take risk.