Insights

Floating Flies Again in Q3 2023

24 October 2023 5 min read

Simon Mullumby, CFA

Head of Australian Cash and Bonds

Senior unsecured floating rate bank returns in AUD have again delivered very palatable performance in the face of fixed rate volatility in Q3 2023. Fixed income on a comparative basis versus floaters had a tough quarter as it became clearer that the monetary policy delivered thus far in many central bank tightening cycles might not be over.

In addition to this higher for longer mentality in most money markets globally, it is becoming evident that the higher interest rates delivered by the RBA (Reserve Bank of Australia) so far has not fractured the Australian economy. Furthermore, the RBA is now going through a period of calibration to gauge what impact the 4% of tightening has had more broadly. Whilst there is still unemployment well inside the RBA’s target level of ~4.5% by the end of 2024 and inflation still printing several percentage points above the 2-3% target zone¹, bond yields and Bank Bill Swap Rate (BBSW) yields will continue to edge higher.

Outside of yields curves moving markedly higher over the quarter, there was also good supply from primary issuers in the domestic market. The major four banks provided consistent 3 and 5yr issuance at spreads that were both embraced by the money market and provided consistent new issue primary price points to compare with secondary market pricing. On that note, there were a handful of Term Funding Facility maturities during the quarter that had very little liquidity impact on the market. Even with the primary issuance printing press working well during the quarter, and certain banks repaying substantial Covid period 0.10% term 3yr loans from the RBA, spreads did not move or reprice markedly higher.

The portfolio maintained a very liquid profile during the quarter with an average credit rating of AA-/A+ with spread duration continuing to target the 2.5-3yr zone. Interest rate duration never exceeded 90 days given the fund is made up of floating rate notes that reset their coupon every 3 months. In light of the ongoing push for higher in yield curves, running this short interest rate duration has served investors in the fund very well during Q3 2023.

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Footnotes

Disclosure

Issued by State Street Global Advisors, Australia, Limited (AFSL Number 238276, ABN 42 003 914 225) (“SSGA Australia”). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: +612 9240-7600 · Web: ssga.com.

The views expressed in this material are the views of Simon Mullumby, Head of Australian Cash & Bonds through the period ended 17 October 2023 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. There is no representation or warranty as to the current accuracy of this material, and SSGA Australia shall have no liability for decisions based on such information.

Investing involves risk including the risk of loss of principal.

Floating rate securities are often lower-quality debt securities and may involve greater risk of price changes and greater risk of default on interest and principal payments. The market for floating rate securities is largely unregulated and these assets usually do not trade on an organized exchange. As a result, floating rate bank loans can be relatively illiquid and hard to value. Diversification does not ensure a profit or guarantee against loss.

The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.

Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates rise bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks but provide lower potential long-term returns.

All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA Australia's express written consent.

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