Monthly Fund Commentary State Street Floating Rate Fund
In June, the State Street Floating Rate Fund returned 0.48% (net), outperforming the benchmark by 0.38%.1
Australian money markets were relatively stable through June, with BBSW finishing the month little changed despite ongoing volatility in monetary policy expectations and a mixed domestic data backdrop. Following the RBA's decision to leave the cash rate unchanged at 4.35%, front-end pricing remained anchored, with 1-month BBSW ending June at 4.31% while 3-month BBSW finished at 4.46%, broadly unchanged from end of May levels. Longer money market tenors were modestly firmer during the month, with 6-month BBSW retracing from an early-June high of 4.88% to close the month at 4.80%, reflecting a moderation in expectations for further near-term policy tightening as headline inflation eased and economic activity continued to slow gradually. Trading conditions remained orderly throughout the period, with liquidity generally well supported despite intermittent volatility around key economic releases and central bank communications.
Primary issuance activity remained healthy across the FRN market, with approximately A$8.5 billion of new supply brought to market during June. Issuance was concentrated in high-quality financial institutions, including ANZ, Macquarie, DBS and OCBC, with demand remaining strong despite the sizeable supply pipeline. Spreads were generally stable throughout the month, highlighting the market's ability to absorb new issuance without any meaningful deterioration in funding conditions. The primary market continued to provide opportunities to selectively add high-quality credit exposure and enhance portfolio’s yield while maintaining the Fund's defensive risk profile and liquidity characteristics.
The State Street Floating Rate Fund has outperformed its benchmark over all time periods net of fees, delivering +0.99% of alpha over the past 12-months, +1.14% p.a. over the past 3-years and +0.88% p.a. since inception.
Looking Ahead
Market Update and Outlook
Australian bonds continued to rally in June, extending the strong gains recorded in May. The Bloomberg AusBond Treasury 0+ Yr Index returned +0.91%, while the Bloomberg AusBond Composite 0+ Yr Index gained +0.96%. Performance was driven primarily by falling yields, with duration contributing positively across the curve. Combined with carry income, this resulted in another month of solid total returns for Australian fixed income investors.
As expected and in a unanimous decision, the RBA left the cash rate unchanged at 4.35% at its June meeting. The Board reiterated that headline and underlying inflation remain too high, with higher fuel prices and broader cost pressures still posing upside risks to the inflation outlook. At the same time, it acknowledged that "financial conditions are now tighter than they were" following three increases in the cash rate this year, and that there are signs "the economy is slowing as expected". The Board emphasised that uncertainty remains heightened, particularly around the persistence of global energy price pressures, domestic capacity constraints and the potential for second-round effects on wages and prices. While the decision to hold provides time to assess the impact of earlier tightening, the Board retained a clear tightening bias, noting that it will do what is necessary to return inflation to target, including raising the cash rate further if required.
The RBA continues to face a difficult balancing act, with inflation remaining above target even as tighter financial conditions begin to slow activity. While recent inflation data was mixed, underlying price pressures remain elevated and the Board has made clear that it remains focused on preventing inflation from becoming embedded. At the same time, labour market conditions have softened modestly and broader growth indicators point to a gradual easing in demand. With this, market pricing continues to imply only a limited risk of additional tightening, with the cash rate expected to remain broadly unchanged over the next year. As such, we expect the RBA to remain on hold in the near term, with the policy outlook remaining firmly data dependent and increasingly sensitive to incoming inflation and labour market data.
Bottom Line
“Life is a balance between holding on and letting go.” — Rumi
Jalāl al-Dīn Muhammad Rūmī was a 13th-century Persian poet, scholar and philosopher whose writings continue to resonate centuries later through their exploration of change, uncertainty and the human experience. His observation that “life is a balance between holding on and letting go” highlights the importance of adaptability in a world that is constantly evolving. In investing, there are times when holding on too tightly to a position or a particular view can become a risk in itself. Markets change, economic conditions evolve and outcomes rarely unfold exactly as expected. The most successful investors are often those who remain open-minded, adapt as new information emerges and avoid becoming anchored to a single outcome.
While inflation has moderated significantly from its 2022 peak, recent data suggests that the final stage of the disinflation process may be more challenging than expected. As illustrated in Figure 1, both headline and trimmed mean inflation remain above the RBA's target midpoint, while underlying inflation has shown signs of persistence in recent months. This has reinforced the RBA's cautious approach to monetary policy, with the cash rate remaining unchanged at 4.35% and markets pushing expectations for policy easing further into the future. More recently, the escalation of tensions in the Middle East has added another layer of uncertainty, particularly through the potential impact on energy prices and inflation expectations. As a result, markets are no longer solely focused on the timing of future rate cuts, with some probability now being assigned to the potential for further policy tightening should inflation rates continue to rise.
In this environment, inflation remains one of the most important variables for investors to monitor. Unlike traditional fixed-rate bonds, floating rate notes are inherently positioned to navigate periods of market uncertainty. As coupons reset in line with prevailing money market rates, FRNs provide investors with protection should rates continue to move higher. At the same time, investors continue to benefit from the attractive level of income currently available across short-term money markets and investment-grade credit. With inflation remaining above the RBA's target band, geopolitical tensions creating additional uncertainty and markets moving away from pricing any easing in the cash rate, now may be a practical time to add or maintain an allocation to FRNs. With the portfolio's all-in yield remaining well above cash rates, FRNs continue to offer a compelling combination of income generation, capital stability and liquidity. Rather than requiring investors to make a directional call on interest rates, FRNs can provide a flexible structure that can adapt to changing interest rates and policy settings while continuing to deliver attractive risk-adjusted income.
Figure 1: Inflation remains above the RBA target band
Figure 1 shows that inflation remains above the RBA's target midpoint despite a significant moderation from peak levels. The persistence of underlying inflation continues to support a cautious outlook for interest rates.