Monthly Fund Commentary State Street Floating Rate Fund
In October, the State Street Floating Rate Fund returned 0.38% (net), outperforming the benchmark by 0.07%1.
Australian short‑end rates were volatile in October, starting with a rally in the first half of the month as markets leaned towards a more dovish outcome. Market positioning was reflecting a cautious RBA and a benign inflation path, pricing in a further cut for late 2025 and additional cuts into early 2026. That narrative flipped after Governor Bullock’s hawkish speech and the stronger‑than‑expected Q3 CPI (+1.3% QoQ headline, +1.0% QoQ trimmed mean) on 29 Oct. The CPI shock saw the short end of the money market yield curve remain anchored near the cash rate, while the longer end saw BBSW 3-months+ tenors sell off, steepening the curve.
Market activity picked up around key events. Early in the month, traders positioned for rate cuts by taking exposures that would benefit if rates fell, buying fixed rate exposure through swaps and short dated bonds. After the Governor’s speech and the CPI surprise, that flipped – traders began selling swaps and 3 year futures, positioning for a lower chance of further RBA rate cuts, and instead expecting the cash rate to remain unchanged over the coming months. The fund continues to perform strongly and we remain long spread duration which has benefited performance. Over the month we bought CBA ‘30’s in the secondary market as they represented value, and the flood of issuances the market was expecting in Q4 has not eventuated.
The State Street Floating Rate Fund has outperformed its benchmark over all time periods net of fees, delivering +0.98% of alpha over the past 12-months, +1.31% p.a. over the past 3-years and +0.89% p.a. since inception.
Looking Ahead
Market Update and Outlook
Australian fixed income markets delivered positive returns in October. The Bloomberg AusBond Treasury 0+ Yr Index advanced +0.34%, while the broader AusBond Composite Index gained +0.36%. Despite yields rising modestly across the front half of the yield curve, returns remained positive through carry and roll-down as coupon income and the pull to par effect more than offset the small price drag from higher front end yields.
With no scheduled policy meeting in October, the cash rate remained unchanged with attention centering on the September minutes and the looming CPI print for Q3. The minutes noted that monetary policy is “probably still a little restrictive” and that “it was appropriate to leave the cash rate unchanged”. Yields began to drift lower on the RBA’s comments, however things quickly reversed after Governor Bullock’s speech and once CPI printed higher than expected, reversing all the gains made since mid-month. This resulted in the board holding the cash rate at 3.60% at their November meeting, acknowledging that “inflation has recently picked up” and that even though “some of the increase in underlying inflation… was due to temporary factors”, the RBA upgraded its central forecast for core inflation to remain above 3% well into 2026, reinforcing a data‑dependent but hawkish bias.
With Q3 CPI surprising to the upside and the RBA’s November forecasts projecting core inflation to remain above 3% well into 2026, policy is set to remain restrictive for an extended period. The Board’s tone and Deputy Governor Hauser’s recent remarks post month-end reinforce a hawkish bias, noting that “financial conditions are clearly more close to neutral than we thought they were a while ago.” We believe near-term easing is off the table, with the most likely path being a prolonged hold at 3.60%. Any adjustments will be contingent on clear evidence of disinflation and softer demand, and markets should expect data-driven decisions with continued volatility around CPI releases.
Bottom Line
“The only constant in life is change.” – Heraclitus
Heraclitus was an ancient Greek philosopher (circa 535–475 BC) known for his doctrine of flux in which the idea that everything is in constant change.
Heraclitus taught that “the only constant in life is change”, a truth that resonates deeply with today’s markets. Just as you can never step into the same river twice because the water is always moving, data and markets shift constantly – sometimes in an instant, just as we saw after October’s CPI shock. For investors, this means rigidity is risky. Floating Rate Notes (FRNs) can embody the principle of adaptability: their coupons reset with prevailing market rates, allowing portfolios to move with the current rather than fight it. In a world where central bank policy and inflation can turn on a dime, FRNs offer a way to stay aligned with change, reduce interest rate risk, and preserve flexibility without sacrificing income potential.
Last month we noted that Australian Headline CPI appeared to be re-accelerating with the monthly print rising to 3.0%2 over the year to August. Since Q3’s release, the annual rate of headline inflation is now +3.2%3. Trimmed mean inflation, the RBA’s preferred measure, has also risen by more than expected, increasing to an annual rate of +3.0%3 - well above the Banks target of 2.5%. The RBA has also increased their CPI forecasts4 out to 2027, see Figure 1 and Figure 2, that represent Headline and Trimmed Mean CPI levels and a comparison of the RBA’s Forecasts from their August Statement of Monetary Policy (SoMP), compared to their most recent November SoMP.
Given where CPI is now and projected to be, along with the combination of trend GDP growth, and full employment in a still strong labour market, the RBA will have limited tolerance for any further upside surprises to inflation and hence, will be in no hurry to adjust rates in any direction. All this bodes well for Floating Rate Note holders as the cash rate expected to remain stable until early to mid-next year.