The seismic shift in fixed income after a 30 year bull market for bonds has created significant portfolio construction challenges.  This paper analyses the role of Fixed Income in asset allocation within a new phase of potentially rising interest rates and explores the thesis that capturing the traditional relationship of fixed income in the total client portfolio will require more untraditional approaches. This research explores this dilemma by considering the Fixed Income investment universe and proposes that Australian fixed income portfolio construction needs to:

• Retain some core local exposure in order to match the income requirements of Australian investors
• Expand the opportunity set to achieve the desired (relatively uncorrelated) relationship of bonds to risky assets.

The significant internationalization of Australian fixed income over the last 10 years has meant that Australian fixed income is already globally oriented in composition and also in terms of the influences that drive returns. This evolution presents opportunities for investors looking to more optimally blend bonds with their growth assets

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