Monthly fund commentary State Street Floating Rate Fund
In April, the State Street Floating Rate Fund returned 0.52% (net), outperforming the benchmark by 0.18% .
Australian money markets remained choppy through April, though conditions improved toward month end. Short-term interest rates stayed sensitive to global market sentiment and RBA policy expectations, with a slightly higher-than-expected CPI print, reinforcing a cautious tone. Yields on 1–3 month money market instruments ticked up about 10–15bps from late March, while longer tenors held steadier, leading to a modest flattening at the very front end. Liquidity was generally adequate but uneven; periods of thin market depth and wider bid-ask spreads led to some sharp intraday moves at times. By late April, however, short-term rates stabilised as markets digested the inflation data and near-term RBA expectations became clearer. Overall, volatility began to subside heading into May, offering a firmer footing for cash and floating-rate assets.
Across credit markets, funding conditions proved resilient. Short-dated credit spreads, which had widened in late March amid global risk aversion linked to conflict in the Middle East, tightened through April as sentiment improved. Investors maintained steady demand for high-quality corporate and floating-rate exposures, helping spreads retrace much of March’s volatility-driven widening. In this environment, the Fund prioritised liquidity and selectively added high-quality FRNs opportunistically, seeking to enhance yield while preserving credit quality and flexibility. Notably, the portfolio continued to switch into new senior unsecured AUD issues from major international banks when opportunities arose, boosting income without compromising its conservative profile.
The State Street Floating Rate Fund has outperformed its benchmark over all time periods net of fees, delivering +1.15% of alpha over the past 12-months, +1.09% p.a. over the past 3-years and +0.86% p.a. since inception.
Looking ahead
Market update and outlook
Australian bonds stabilised somewhat over April after March’s sell-off. The Bloomberg AusBond Treasury 0+ Yr Index fell -0.08%, while the broader AusBond Composite 0+ Yr Index was effectively flat at +0.1%. While bond yields rose slightly over the month, carry largely offset the move in yields, resulting in close to flat returns.
With no RBA meeting in April, market focus shifted to policy expectations, with OIS pricing implying around a two-thirds probability of a 25bp hike ahead of the early May meeting. This was ultimately delivered on 5 May, with the RBA raising the cash rate by 25bp to 4.35%. The Board reiterated that inflation remains too high and that risks are tilted to the upside, particularly given the impact of higher fuel prices and the potential for second-round effects, noting that it remains “attentive to the data and the evolving assessment of the outlook and risks.” At the same time, it emphasised materially heightened uncertainty around the outlook, reinforcing a data-dependent approach as it assesses evolving risks.
The RBA continues to face a difficult trade-off, with inflation pressures proving more persistent even as growth shows signs of slowing. While some activity indicators have softened, the lift in headline inflation and rising short-term inflation expectations reinforce the risk that disinflation will be slower than previously anticipated, particularly as higher energy prices feed through. Market pricing has adjusted accordingly, now implying a more gradual but extended tightening cycle, with the cash rate expected to peak around 4.7% in early 2027 before easing modestly thereafter. This reflects the view that while the RBA may not need to move aggressively in the near term, policy is likely to remain restrictive for longer. Against this backdrop, we expect the RBA to remain on hold in the near term to assess the evolving data, following the May hike. However, the risk profile remains skewed to the upside, particularly if inflation proves more persistent or global energy dynamics deteriorate further. As such, further tightening at the June meeting cannot be ruled out, with the path of policy remaining firmly data dependent.
Bottom line
“The best way to deal with an uncertain future is to build resilience into the present.” — Howard Marks
Howard Marks is a renowned investor and co-founder of Oaktree Capital Management, celebrated for his wisdom on risk management and navigating uncertain markets. Marks’s advice to “build resilience into the present” underscores the importance of constructing portfolios that can withstand surprises rather than trying to predict every twist in the economy. This perspective resonates strongly now, as geopolitical tensions, persistent inflation risks, and a still-restrictive RBA policy make the future path unusually unclear. Floating Rate Notes exemplify resilience in practice – as interest rates change, their coupons automatically adjust to prevailing conditions, so income rises along with yields while capital values remain steady. In a world of elevated uncertainty, FRNs offer a structure that moves in step with the market rather than against it – allowing investors to stay prepared and maintain stability as conditions evolve.
This emphasis on resilience is not theoretical; it reflects the reality investors are facing today. The global backdrop remains highly uncertain, reinforcing the case for a resilient strategy. Geopolitical tensions – particularly the war in the Middle East – have driven oil prices sharply higher, lifting inflation and prompting further tightening by the RBA. With inflation still above target, the RBA has revised its inflation outlook higher, now expecting CPI to peak near 4.8% by mid 2026, compared with 4.2% previously, and has signalled a higher path for interest rates, with the cash rate now forecast to rise to around 4.7% by the end of 2026, compared with earlier expectations closer to 4.2%. Yet uncertainty around the duration and severity of the war means the outlook for inflation and monetary policy remains unusually uncertain. As Figure 1 illustrates, higher energy prices are feeding directly into inflation and reinforcing the risk that policy rates may need to move higher than previously expected, and could remain restrictive for longer. Until the trajectory of the conflict and its impact on energy markets becomes clearer, the RBA is likely to maintain a restrictive policy stance, with further tightening remaining a possibility should inflation prove more persistent than anticipated.
FRNs offer both rising income and capital stability as interest rates move higher, their coupons reset in line with short-term rates, so income scales up when yields climb, while their near-zero duration keeps price volatility low. Historical stress periods reinforce this: FRNs delivered steady or positive returns through the COVID shock, the rapid 2022–23 RBA hiking cycle, and the current conflict-driven volatility, whereas fixed-rate bonds experienced larger swings and drawdowns as illustrated in Figure 2. FRNs’ resilience and rising coupon income allowed them to weather these challenges and even outperform traditional bonds when rates spiked or uncertainty surged. With front-end yields now elevated and policy risks still tilted upward, FRNs may be worth considering as part of a core allocation. They can provide a buffer in volatile markets, preserving capital and delivering higher levels of income as rates rise, thereby helping to keep portfolios on track, even in turbulent conditions. In our view, the current climate strengthens the case for FRNs, as investors seek to balance attractive income with capital stability amid ongoing uncertainty.
Figure 1 above compares the RBA’s cash rate forecasts from the February and May Statements on Monetary Policy. The upward revision in the expected policy path highlights the risk that interest rates may need to rise further and remain restrictive for longer, particularly amid ongoing uncertainty around inflation and energy prices.
Figure 2 compares total returns of Australian fixed‑rate bonds as defined by the Bloomberg AusBond Composite 0+ Yr Index and Australian floating‑rate notes as defined by the Bloomberg AusBond Credit FRN 0+ Yr Index during three distinct periods of market stress: the COVID sell‑off (Mar 2020–May 2023), the RBA rate‑hiking cycle (May 2022–Nov 2023), and the recent Middle East conflict (Feb 2026–Apr 2026).