Monthly Fund Commentary State Street Floating Rate Fund
In May, the State Street Floating Rate Fund returned 0.51% (net), outperforming the benchmark by 0.16%1.
Australian money markets remained unsettled through May, with front-end pricing continuing to react to shifting policy expectations, domestic data surprises and intermittent geopolitical headlines. BBSW moved higher across the curve, with 1–3 month tenors rising by around 8–10bps from end-April to end-May, while 4–6 month tenors increased by a more modest 5–6bps, leaving the very front end slightly flatter. Although outright levels lifted following the RBA's May tightening, late-month pricing was tempered by softer inflation data and easing expectations for further near-term hikes. Trading conditions were mixed, with a number of choppy intra-month sessions characterised by early selling followed by late buying. Front-end markets continued to function well despite periods where liquidity appeared thinner around event risk and offshore headlines, while by month-end rate ranges had narrowed as June tightening expectations eased and pricing became more data dependent.
Across short-dated credit, funding conditions remained constructive despite the volatility in rates, with bank FRN spreads tightening only slightly from early-May levels. Primary issuances was elevated, as approximately A$15.5bn of new supply came to market, led by the Big Four alongside a significant contribution from offshore kangaroo issuers, highlighting strong investor demand and the market’s ability to absorb supply without any deterioration in funding conditions. In this environment, kangaroo issuances again provided the Fund with additional 5-year senior unsecured bank exposures, which were utilised opportunistically to enhance portfolio yield while maintaining overall credit quality and liquidity.
The State Street Floating Rate Fund has outperformed its benchmark over all time periods net of fees, delivering +0.93% of alpha over the past 12-months, +1.15% p.a. over the past 3-years and +0.87% p.a. since inception.
Looking Ahead
Market Update and Outlook
Australian bonds rebounded in May following April’s more benign performance, delivering their strongest monthly return since April 2025. The Bloomberg AusBond Treasury 0+ Yr Index rose +1.64%, while the AusBond Composite 0+ Yr Index gained +1.62% over the month. The rally was driven by a decline in yields, with both duration and carry contributing positively, resulting in solid total returns across the curve.
The RBA delivered a 25bp increase at its May meeting, raising the cash rate to 4.35%, in an 8–1 decision. 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, while 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 despite maintaining a hawkish bias. While the updated forecasts showed weaker growth and only a modest rise in unemployment, the Board’s concern around elevated short-term inflation expectations and the risk of broader price pass-through suggests the risk of further tightening has not been fully ruled out, even as policy is now judged to be restrictive.
The RBA continues to face a challenging trade-off, with policy now at a more restrictive level, the question remains how many more hikes are needed to bring inflation under control. While the risk of further tightening has not been fully ruled out, particularly if inflation proves more persistent or second-round effects intensify, the threshold for additional hikes appears higher. At the same time, an easing in Middle East tensions and a moderation in oil prices should help alleviate near-term inflation pressures. Market pricing reflects this shift, with only a modest further tightening bias implied in the RBA OIS curves. As such, we expect the RBA to remain on hold in the near term, with the policy path remaining firmly data dependent and increasingly sensitive to both the inflation and the labour market.
Bottom line
“Success is where preparation and opportunity meet.” – Bobb Unser
Bobby Unser was a three-time Indianapolis 500 champion and one of the most accomplished drivers in motorsport, competing at the highest level in an environment where success depends not just on skill, but on meticulous preparation and the ability to execute under pressure. His observation that “success is where preparation and opportunity meet” captures a principle that extends well beyond sport. In uncertain environments, outcomes are not driven by prediction, but by how well prepared you are when opportunities arise. For the State Street Floating Rate Fund, that preparation begins with credit research. It is this upfront discipline that provides the foundation for every investment decision, ensuring that when opportunities emerge – whether through market dislocation, changing funding conditions, or relative value across issuers – we can respond with confidence. In this sense, credit research is not simply part of the process; it is what enables us to be prepared, ensuring we are positioned to take advantage of opportunities rather than reacting to them.
Credit research sits at the core of our investment process and is the first step in constructing a resilient floating-rate portfolio. In cash and FRN (floating rate note) strategies, where returns are incremental and capital preservation is critical, avoiding downside risk is far more important than chasing yield. Our process is built on disciplined, bottom-up fundamental analysis, supported by a global research platform with deep sector expertise and full capital structure coverage. This scale, combined with a large and highly experienced credit research team with extensive track records across market cycles, allows us to consistently assess issuers across regions and instruments, identify relative value, and maintain independent credit views. Importantly, our research is forward-looking, combining quantitative metrics such as leverage, liquidity and cash flow stability with qualitative assessments of business strength, management and industry dynamics. This approach has been tested through multiple market cycles, including the Global Financial Crisis and the pandemic, and remains anchored in our conservative philosophy focused on principal preservation and liquidity. In this sense, credit research is not just a supporting function – it is the foundation that ensures the portfolio is prepared for uncertainty and enables us to construct exposures that can withstand changing market conditions while continuing to deliver stable, risk-adjusted income.
In line with this framework, we selectively allocate to higher yielding international, or “kangaroo bonds”, issuance whenever attractive opportunities emerge. As illustrated in Figure 1, international FRNs within the portfolio consistently provide an income premium over comparable domestic holdings across maturity buckets. This reflects a combination of issuer mix and the modest spread premium typically offered by offshore issuers in AUD markets, while exposures remain firmly within the investment grade universe. Many of these institutions are large, well-capitalised global banks with strong balance sheets and stable funding profiles, and are comparable in credit quality to domestic majors. As a result, the portfolio is able to enhance carry while maintaining its conservative risk profile.
At the end of May, the Fund’s all-in yield was 5.18%, providing investors with a meaningful income advantage relative to cash, while maintaining exposure to highly rated securities and preserving strong levels of liquidity. This balance between income, quality and liquidity remains central to the portfolio’s design.
Figure 1 shows the average coupon rates for Australian versus international floating rate note issuers held within the portfolio, split by maturity year. It reflects the realised income generated from domestic and offshore exposures based on current holdings.
International FRNs consistently provide a higher level of income across all maturity buckets. These issuers offer a modest yield premium when issuing in AUD, while remaining high-quality investment grade credits, comparable to domestic majors. Supported by our global research capability, we have the confidence and depth of understanding to invest in these offshore issuers, allowing the portfolio to enhance income without compromising credit quality or liquidity.