As Australia’s cash rates stabilise and economic growth softens in 2025, investors hungry for yield are turning their gaze towards high-yield bonds. These debt securities, often dubbed ‘junk bonds’, offer the tantalising prospect of higher returns—but not without a higher dose of risk. With regulatory tweaks and market volatility on the horizon, it’s time to reassess the role of high-yield bonds in an Australian portfolio.
What Are High-Yield Bonds—and Why the 2025 Buzz?
High-yield bonds are corporate bonds rated below investment grade (typically below BBB- by S&P). Their higher interest payments compensate investors for a greater risk of default. In 2025, the global hunt for yield is intensifying as central banks, including the RBA, maintain a cautious stance on rate hikes, keeping traditional fixed income returns relatively muted.
- Australian corporates are issuing record volumes of high-yield debt, especially in sectors like mining, property, and renewables.
- Retail access has expanded, with ETFs and managed funds bringing high-yield exposure to everyday investors.
- Policy changes: APRA’s recent tightening of capital requirements for banks has encouraged more companies to seek funding through bond markets.
Risks and Rewards: The 2025 Landscape
High-yield bonds can be rewarding, but 2025 presents fresh challenges. As economic uncertainty lingers, credit spreads (the extra yield over government bonds) have become more volatile. Here’s what stands out this year:
- Default risk: Rising corporate insolvencies, especially among speculative-grade issuers, have analysts forecasting a modest uptick in defaults compared to 2023–24.
- Sector-specific concerns: Property developers and junior mining firms face refinancing hurdles as global investors turn more selective.
- Liquidity risk: Thin secondary markets can make it difficult to exit positions quickly during market stress.
Despite these risks, high-yield bonds have outperformed government bonds over the past 12 months, with some Australian high-yield funds delivering annualised returns north of 7%.
Building a Smarter High-Yield Strategy
For Australians considering high-yield bonds in 2025, a measured approach is key. Here are some strategies to balance risk and reward:
- Diversification: Avoid concentrated bets on single issuers or sectors. Use diversified funds or ETFs to spread risk across industries and geographies.
- Credit research: Focus on issuers with strong cash flow, manageable debt, and transparent reporting. Many fund managers now stress ESG (environmental, social, governance) criteria in their credit analysis.
- Laddering maturities: Staggering bond maturities can help manage reinvestment risk and take advantage of changing rate environments.
- Active management: In volatile conditions, active managers can pivot portfolios away from deteriorating credits and seize opportunities in undervalued issues.
For self-directed investors, platforms like ASX’s mFund and Chi-X offer access to a growing suite of high-yield bond ETFs and listed funds tailored for Australian conditions.
Real-World Example: High-Yield in Action
Consider the case of an Australian infrastructure company that issued high-yield bonds in 2024 to fund a major solar project. The bonds offered a 7.5% coupon, drawing strong interest from both institutional and retail investors. Despite some sector headwinds, the company’s stable cash flows and government-backed contracts provided a cushion against default risk, illustrating how careful credit selection can pay off even in a riskier segment.
Policy Watch: What’s Next?
In 2025, regulators are watching the high-yield market closely. The Australian Securities and Investments Commission (ASIC) is monitoring disclosure practices and warning investors about the risks of ‘greenwashed’ high-yield products that overstate their ESG credentials. Meanwhile, the RBA’s Financial Stability Review cautions about systemic risks if a wave of defaults were to coincide with a downturn in property or resources.
