In this quarterly report the Australian Fixed Income team provide a concise domestic economic, credit and currency outlook for Q4 2026.
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Monetary and Fiscal Policy – the RBA is back in tightening mode, and the next CPI print will set the tone
On 29 September, the RBA Monetary Policy Board lifted the cash rate target by 25 basis points to 4.60% — the fourth hike of 2026 and, on a unanimous vote, the highest cash rate in close to 15 years. Upside risks flagged earlier in the year are now materialising: a broader Middle East conflict is lifting global energy prices, AI-related demand is driving rapid gains in technology-related goods prices, and capacity pressures and inflation expectations remain elevated. Further tightening remains a possibility, with the Board signaling it will continue to do “what it considers necessary… including increasing the cash rate target further if needed.”
The Q3 2026 CPI release on 28 October will be key, and be out just before the next RBA board meeting on 3 November. Recent monthly inflation data remains high — with headline inflation at 4.0% y/y in August. Our base case is that another 25bp hike remains more likely than not, but is highly data-dependent; a stronger print would strongly validate the Board's hawkish stance.
Rates and Macro – a global repricing of the long end, not just in Australia
The quarter closed with the Australian 10-year yield at 5.36% on 1 October, consistent with a wider sovereign repricing, the US 10-year is near 5.29% and the US 30-year 5.63% at end of month, and the Japanese 10-year at 3.13% for the first time since 1996. The drivers are more structural than cyclical. These include elevated sovereign debt and expanding deficits across advanced economies, hyperscaler issuance competing for long-dated capital, higher-for-longer policy rate expectations, and renewed Middle East–driven oil pressures.
The RBA's October 2026 Financial Stability Review, released on 1 October, also highlighted this risk, noting that debt sustainability concerns may begin to mount if bond yields continue to rise without a commensurate increase in growth expectations. For investors, this does present an income opportunity in fixed income noting recently elevated bond yield levels which are now providing a greater buffer than previously. Note that we expect volatility in the long end to remain elevated, and therefore prefer to earn carry in the mid tenors of the curve where we are being well compensated compared to duration at the ultra-long end.
Source for charts: LSEG Datastream. Data as at 30 September 2026. *Bars show current 10-year benchmark yield and dots show the highest yield over the past 15 years. Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.
Credit Markets – a structurally deeper AUD market, with hyperscalers and data centres making their presence known
Alphabet's inaugural A$5.5bn Kangaroo on 19 August was the largest corporate bond ever priced in the Australian market. Priced across four tranches (3-, 5-, 10- and 20-year, and a 20-year coupon of 6.9%) and rated Aa2/AA+, the deal attracted a peak order book of around A$20bn from investors globally. The deal should encourage follow-on issuance from other global technology names and AI-infrastructure borrowers. Australian data-centre operators have also been issuing into the public credit market this year, with deals from NextDC and CDC. Despite rapid growth, funding raised in Australia for data centres thus far remains small and is unlikely to crowd out other sectors any time soon.
Investors should balance the opportunity against the risks the RBA flagged in the FSR: increasingly opaque and "circular" financing structures in the global AI value chain. Our preference remains for investment-grade issuers with contracted cash flows, visible leverage and strong tenant pre-commitments, and we are selective where the structure is more project-finance than traditional corporate.
Notable issuance trends we are watching into Q4:
- Preference for utilities, consumer nondiscretionary, data centres. More cautious on office REITs, healthcare and airlines. Favour issuers with visible cash flow, and demonstrable funding flexibility.
- Big Tech and hyperscaler Kangaroos – Alphabet's success broadens the opportunity set and should encourage further AUD issuance from offshore technology, cloud and AI-infrastructure issuers.
- Hybrids and Tier 2 – continued APRA-driven transition and solid investor demand for subordinated bank paper.
*Source: BlackRock Bloomberg Aus Bond indices. Data as of 31st August 2026. Index used for Subordinated Debt – Bloomberg MSCI Australian 100mn ESG Weighted SRI Select Index with data available from 31st January 2019. Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.
Monetary policy: With inflation still above target and the RBA retaining a hawkish bias, we see the risk of further tightening, although the 28 October quarterly CPI will be critical ahead of the November meeting.
Bond yields: Australian yields have repriced materially higher. At these levels, starting yields provide attractive income and a greater buffer against volatility, although persistent inflation, heavy sovereign issuance and higher global yields argue for a cautious approach to duration. Preference for short to mid tenors for the pick-up in yield, play the long end selectively.
Credit: Credit fundamentals remain broadly resilient and higher all-in yields continue to support demand. Importantly, the opportunity set is also broadening: Alphabet’s landmark AUD issuance highlights this potential
FX: Higher domestic rates and Australia’s position as a net energy exporter provide support, while moderating growth and elevated global risk uncertainty remain headwinds. Recent rate rises in the US have also reduced the differential with Australia. We expect the currency to remain sensitive to the relative RBA/Fed policy path, commodity prices and global risk sentiment.
Recent Market Data
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▲ QoQ GDP grew 0.4%, with the annual rate lifting to 2.1% YoY
The annual pace was above consensus due to upward revisions to previous quarters. Household consumption rose (0.5% QOQ) largely driven by discretionary spending (+1.4%) and rising household disposable income (+0.6% QoQ). Private business investment was flat, machinery & equipment fell -5.6% QoQ while dwelling investment rose +1.6% QoQ. Public final demand rose just +0.2%qoq (2.1%yoy) as fiscal consolidation continues to slow the pace of public spending growth. Net exports added to growth as mining exports rebounded from weather disruptions: exports +0.8% QoQ versus imports +0.5% QoQ. The terms of trade fell -1.6% QoQ (-0.6% YoY).
Source: ABS, Bloomberg, BlackRock as of 30/09/2026
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▼ Conditions fell -5pts MoM to -1pts
▼ Confidence fell -2pts MoM to -8ptsBusiness conditions fell 5pts in August to -1 index points, the weakest reading in six years and well below the long-run average of +7. The fall was broad-based, led by a sharp decline in profitability. Business confidence fell a further 2pts to -8 index points, extending July’s decline, with Middle East uncertainty, oil prices and the cumulative effect of RBA tightening continuing to weigh on the outlook. Forward-looking measures stayed soft, with forward orders (-3→0) and capex intentions (3→2) still below both their pre-conflict levels whilst employment was unchanged at 3 points. Capacity utilisation fell from 83.1 to 82.5%.
Source: NAB, Bloomberg, BlackRock as of 30/09/2026
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▼ The Westpac-M.I. Index of Consumer Sentiment fell by 5.2% MoM to 84.4 in September.
Consumer sentiment remains deeply pessimistic. Both fuel prices and interest rates again look to be driving the move. The ‘time to buy a major item’ sub‑index fell by 4.8%, while the ‘family finances vs a year ago’ sub‑index dropped by 9.2% to 72.6. The forward view speaks to particularly acute fears. As confidence in the economy over the next five years deteriorated further, with the sub‑index fell 4.5% and household financial expectations over the next 12 months fell by 3.8% to 79.5. The near‑term economic confidence weakened further, with the ‘economy, next 12 months’ sub‑index fell 4.0% to 79.5 and remains at a very weak level.
Source: Westpac, Bloomberg, BlackRock as of 30/09/2026
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▲ Headline CPI rose by +0.4% MoM
▲ Annual inflation rose from 3.5% to 4.0%Australian monthly CPI rose +0.42% MoM in August, lifting the annual rate from 3.5% to 3.97% YoY – just below the 4.1% consensus, but a full point above the top of the RBA’s band. The trimmed mean rose +0.24% MoM (consensus +0.3%), with the annual rate easing 5bp to 3.57% YoY – 3.6% for a third month. Transport was the largest contributor (+0.47ppt) largely driven by surging fuel prices +14.8% MoM on top of July’s 7.5% as excise relief fully unwound and oil prices rose. Recreation & culture fell -1% MoM and downside surprises came from food (-0.1% MoM), clothing & footwear (-0.9% MoM). Housing (5.7% YoY) stayed sticky as electricity failed to fall, though new dwellings and rents slowed.
Source: ABS, Bloomberg, BlackRock as of 30/09/2026
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▲ Number of jobs rose by +39.5k in August.
▼ The unemployment rate rose from 4.5% to 4.6%.In August Australian labour force rose by 39.5k following a -15.9k fall in July. Full-time jobs fell by -6.3k although was more than offset by a +45.8k rise in full-time. The unemployment rate rose by 10bps from 4.5% to 4.6%. The participation rate jumped by 2/10ths to 67.1. Hours worked rose by +0.7% MoM to be 1.7% higher over the year and in line with employment growth which rose 0.3% MoM and 1.6% YoY. Labour market was broadly steady with underemployment falling (6.3→6.2%) and underutilization unchanged at 10.8%. The rolling 12mth average supply of labour is 26.5k, whilst the 3mth and 6mth demand for labour are 34k and 20k respectively.
Source: ABS, Bloomberg, BlackRock as of 30/09/2026
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▲ Wages increased by 0.81% over Q2
▼ Annual wage growth fell from 3.3% YoY to 3.2 YoYAustralian Wage Price Index in Q2 increased by 0.81% QoQ following a 0.75% increase in Q1-26. This was in line with the market consensus. The annual rate fell from 3.3% to 3.2% YoY. Private sector wages rose +0.7%qoq increasing by 3.1% YoY down from 3.4% YoY. Public sector wages increased by +0.9% QoQ with the annual pace slowing from 3.7% to 3.4%, reflecting new enterprise agreements in health, education and the Commonwealth public service. In particular, wage growth in nursing and teaching outpaces the national average. Headline wage growth at 3.2% is modestly below the RBA’s track, which has wages growth at 3.3% for the rest of this year.
Source: ABS, Bloomberg, BlackRock as of 30/09/2026
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▲ Increased the cash rate by 25bp to 4.60% in a unanimous decision – it’s fourth hike this cycle taking the cash rate to its highest level since November 2011.
The RBA statement retained an explicit tightening bias, with the willingness to “increase the cash rate target further if required” and remaining focused on ensuring inflation does not become embedded once the oil price impulse passes through. The RBA remains concerned that inflation is proving more persistent than expected, with both headline and underlying inflation remaining above target amid ongoing capacity pressures and higher energy costs. While tighter financial conditions are slowing consumer spending and housing activity, the labour market has remained relatively resilient. Although inflation expectations have eased somewhat, they remain elevated, reinforcing the RBA’s focus on inflation persistence, capacity constraints, and the extent of the economic slowdown
Source: RBA, Bloomberg, BlackRock as of 30/09/2026
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▼ The Cotality national HVI fell by -1.2% in September
▼ The Cotality national HVI slowed to -1.1% YoYGrowth in Australian national home value index (combined capitals) fell by -1.2% in September with the annual rate slowing to -1.1%. The decline is broad based: “97% of capital city suburbs were down in value over the three months to end of September. Headwinds for housing have increased this year, including affordability, a lift in the cash rate by 100bp, weak consumer confidence, and tax policy changes for housing investors. Private sector credit in August rose +0.6% MoM after a +0.6% MoM increase in July, the annual rate was unchanged at 8,4% YoY. Investor credit growth rose +0.3% MoM although fell from 10.1 to 9.6% on an annual basis. Business credit growth remains strong at 10.9% YoY. Building approvals fell -6.1% in August following a -3.6% fall in July. The annual rate is 10.3% higher over the year.
Source: Cotality, BlackRock as of 30/09/2026
