Monthly Fund Commentary State Street Floating Rate Fund

In January, the State Street Floating Rate Fund returned 0.43% (net), outperforming the benchmark by 0.14%.¹

Australian front-end yields extended their climb through January, driven by stronger-than-expected inflation and labour market data. The December quarter CPI print, particularly the 0.9% q/q trimmed mean, reinforced the view that underlying price pressures remain persistent. This, alongside a sharp rebound in employment and continued tightness in the labour market, saw markets fully price a February hike and begin to contemplate further tightening into mid-2026.

The RBA’s hawkish tone and upward revisions to inflation forecasts in the February SoMP added to the momentum, with the short end under pressure throughout the month. Trading activity was dominated by positioning ahead of the February meeting, with front-end futures increasingly reflecting expectations for additional policy tightening. The tone remained one of bear flattening, supported by resilient domestic demand and a cautious global backdrop. Credit also contributed to performance, with OAS tightening by 4bp over the month. The Fund remains well positioned to capitalise on elevated front-end yields and a robust pipeline of new issuance. The Fund continues to deliver strong performance and attract consistent inflows while the outlook for spreads remains constructive, with the senior unsecured curve continuing to offer attractive value relative to the prevailing rate environment.

The State Street Floating Rate Fund has outperformed its benchmark over all time periods net of fees, delivering +1.00% of alpha over the past 12-months, +1.19% p.a. over the past 3-years and +0.88% p.a. since inception.

Looking ahead

Market update and outlook

Australian fixed income started the year in a relatively quiet manner, delivering effectively flat returns over January. The Bloomberg AusBond Treasury 0+ Yr Index increased by +0.04%, while the broader AusBond Composite Index rose +0.21%. The modest gains were made through carry with yields rising on the back of the market recalibrating the RBA’s upcoming February rate decision.

There was no RBA meeting in January, but the tone shifted meaningfully as the month progressed. December quarter CPI data surprised to the upside, with trimmed mean inflation printing at 0.9% q/q and 3.4% y/y, materially above the RBA’s November forecast. This, alongside stronger-than-expected private demand and a labour market still assessed as “a little tight,” saw market pricing firm to around 80% for a February hike. The RBA’s eventual 25bp increase to 3.85% was widely anticipated, but the tone of the statement, the scale of forecast revisions, and the Board’s unanimous decision delivered a more hawkish message than markets had expected. The SoMP revealed a higher peak in core inflation (3.7% mid-2026) and a delayed return to target, now not expected until mid-2028. While the RBA acknowledged some sector-specific influences, it emphasised that inflation pressures were broad-based, noting “private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight.” The Bank also cautioned that inflation risks remain skewed to the upside and that monetary policy may not yet be clearly restrictive, leaving the door open to further tightening.

Overall, the data flow supported the RBA’s decision to hike in early February, with inflation and labour market strength outweighing softer signals from consumption and housing. Looking ahead, we continue to see the near-term path for Australian rates biased to the upside. The RBA’s February hike, coupled with a more hawkish tone and upward revisions to inflation forecasts reinforces the view that policy is not yet restrictive enough. While the Board remains data dependent, the bar for further tightening appears low. Labour market resilience and persistent services inflation suggest that underlying pressures remain entrenched. For now, the RBA appears focused on ensuring inflation returns to target, and unless upcoming data show a material easing in demand or price momentum, another hike in May remains the base case.

Bottom line

“The future belongs to those who prepare for it today.” — Malcolm X

Malcolm X was a transformative figure in the American civil rights movement known for his unwavering advocacy for empowerment, self-reliance, and the importance of taking control of one’s future. His words speak to the power of preparation not just as a defensive act, but as a proactive strategy for progress. In markets, that same principle applies. Floating rate notes are inherently forward-looking instruments — they reset with rising rates, maintain short duration, and can offer the flexibility to adapt as conditions evolve. In a market where policy remains data-dependent and inflation risks persist, investors who prepare today are best placed to capture elevated income while preserving liquidity and credit quality.

Australian front-end pricing continued to reprice higher through January, with the market now embedding a clear risk of further RBA tightening in 2026. The December quarter CPI print (see Figure 1) showed trimmed mean inflation accelerating to 3.4% y/y, while the RBA’s February Statement on Monetary Policy revised its peak forecast up to 3.7%, delaying the return to target until mid-2028. Labour market strength added to the hawkish tone, with employment surging 65k in December and the unemployment rate falling to 4.1%. This reinforces the view that policy is not yet clearly restrictive, and that the RBA remains prepared to act further if inflation persists.

This backdrop creates a constructive environment for floating rate notes. As shown in Figure 2, the BBSW curve has shifted meaningfully higher since December, lifting income expectations for FRNs (floating rate notes) without adding duration risk. Credit spreads also tightened modestly, contributing to strong performance. With robust demand, elevated reference rates, and a healthy pipeline of new issuance, the FRN market can offer investors attractive entry points, high credit quality, and efficient access to rising income in a low-volatility format.

The chart above shows the Q4 Trimmed Mean CPI alongside the RBA’s trimmed mean inflation forecasts from its last three Statements on Monetary Policy. Since August 2025, the RBA has progressively revised its inflation outlook higher, with the forecast peak for trimmed mean CPI rising from 2.7% to 3.7% as of the February 2026 update.

Figure 2 illustrates the upward shift in the BBSW curve between 31 December and 10 February, highlighting the front-end repricing that followed stronger domestic data and the RBA’s hawkish pivot.

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