Monthly fund commentary State Street Floating Rate Fund
In March, the State Street Floating Rate Fund returned 0.17% (net), underperforming the benchmark by 0.18%.1
Australian money markets saw heightened volatility through March, as front end pricing became more sensitive to global rates sentiment and evolving expectations for the RBA policy path, resulting in elevated activity across short term interest rate markets. Liquidity conditions were uneven over the month, with periods of thin depth and wider bid offer spreads during bouts of heightened volatility, contributing to sharper intraday moves in rates and credit. By late March, the front end benefited from a modest rally, with short dated rates firming richer and curve dynamics stabilising.
Across credit markets, funding conditions remained functional despite the volatility backdrop. While spreads widened modestly at times, the market continued to clear new issuances, supported by underlying demand for high quality, short dated paper. This environment created selective opportunities in the secondary market, particularly where volatility dislocated relative value. Against this backdrop, the Fund remained focused on maintaining liquidity while selectively deploying capital selectively into high quality floating rate securities. Increased investment during the heightened volatility of March allowed the portfolio to capitalise on relative value opportunities,enhancing yield while preserving credit quality and liquidity. Overall, elevated front end yields, resilient issuance conditions and increased dispersion across money markets continued to provide a constructive backdrop for active management through March, with the Fund well positioned to navigate any ongoing volatility.
The State Street Floating Rate Fund has outperformed its benchmark over all time periods net of fees, delivering +0.81% of alpha over the past 12-months, +1.10% p.a. over the past 3-years and +0.85% p.a. since inception.
Looking ahead
Market update and outlook
March saw the biggest drawdown for fixed income since January 2025. The Bloomberg AusBond Treasury 0+ Yr Index fell -1.36%, while the broader AusBond Composite Index lost -1.42%. The sell-off reflected elevated inflation concerns, which were further accentuated by rising oil prices amid Middle East tensions, reversing February’s risk-off tone.
Following its February rate hike the RBA went back-to-back at their March meeting, raising the cash rate by 25bp to 4.10%. The consecutive increase sees the RBA as the only major central bank to tighten their policy rate twice so far in 2026. Importantly, the tone of the March policy statement and minutes were balanced rather than overtly hawkish. The Board reiterated that inflation remains too high and that further tightening may be required, but it also acknowledged greater uncertainty around the outlook and signalled that they “will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions.” In response, market expectations for additional hikes became more cautious as the month progressed.
Looking ahead, as we enter Q2 2026 the trajectory for Australian rates remains skewed to the upside. The RBA has been repeatedly surprised by the resilience of both inflation and growth. With the labour market still relatively tight and the risk of persistently higher inflation, further tightening of monetary policy has remained the prudent course of action. While inflation has eased at the margin, it remains well above target, with higher inflation now forecast as rising oil prices feed through. Heightened global uncertainty stemming from the conflict in the Middle East has further complicated the outlook, with markets currently pricing in two additional rate hikes followed by cuts towards year end. However, the RBA has been clear that it remains forward looking and is unlikely to follow market pricing mechanically. Against this backdrop, we continue to expect one further 25bp hike in the near term, with policy decisions beyond this remaining firmly data dependent.
Bottom line
“Be like water, my friend.” – Bruce Lee
Bruce Lee was a martial artist, philosopher and cultural icon who transformed both combat sports and global cinema through his speed, discipline and visionary thinking. Lee used water as a metaphor for adaptability – fluid, responsive, and resilient in the face of constant change. Water does not resist its environment; it adjusts to it. This philosophy resonates strongly in today’s interest rate landscape, where uncertainty, volatility and shifting policy expectations remain defining features. Floating rate notes embody this adaptability. As short term rates change, FRN yields reset higher or lower in line with prevailing conditions, allowing income to adjust naturally without exposing portfolios to meaningful interest rate risk. In an environment where policy settings remain fluid and inflation risks persist, FRNs offer investors a structure that moves with the market rather than against it – preserving capital while allowing income to respond as yields change.
The ongoing geopolitical uncertainty continues to fuel market volatility, with energy prices remaining particularly sensitive to developments related to the war. Higher and more volatile energy costs risk flowing through to broader inflation pressures, complicating the disinflation narrative and reinforcing upside risks to the inflation outlook. In this environment, the RBA faces renewed pressure to keep policy rates restrictive, and will potentially tighten further, should inflation prove more persistent than anticipated. As Figure 1 illustrates, changes in the policy outlook are transmitted directly through short term interest rates, driving variability in front end yields.
Against this backdrop, floating rate notes represent an effective all weather allocation, offering both capital preservation and rising income as yields move higher. As shown historically during the post COVID hiking cycle, FRNs have demonstrated resilience through periods of sharp rate increases and heightened volatility, benefiting from their floating rate structure and limited duration exposure. Performance since 2020, show in Figure 2, highlights the ability of FRNs to deliver stable returns through a range of market conditions, including the volatile environment experienced in recent years. With front end yields elevated and policy uncertainty set to persist, we see a compelling case for increasing exposure to FRNs at this point in the cycle, as investors seek to balance income generation with capital stability.
Figure 1: Composition of State Street Floating Rate Fund All-In-Yield
Figure 1 shows the drivers of the State Street Floating Rate Fund’s all in yield, comprising the 3 month BBSW reference rate and the portfolio’s discount margin, which together determine investor income. The discount margin represents additional spread earned above BBSW, providing compensation to investors for credit and liquidity risk. The chart also overlays the RBA cash rate and highlights the key policy tightening and easing phases – including the COVID era rate cuts and the 2022 inflation driven rate hikes – to demonstrate how changes in monetary policy are transmitted directly into floating rate returns.
Figure 2 illustrates the growth of a $10,000 investment since March 2020, comparing the State Street Floating Rate Fund with the AusBond Composite 0+ Year Index. Over the period, the Floating Rate Fund delivered strong positive returns with lower drawdowns, generating a total return of 22.49% (3.44% annualised), while the AusBond Composite Index experienced negative returns. The chart highlights the fund’s ability to perform across differing market environments during ultra low rates, sharp rate hikes, and heightened volatility, demonstrating the defensive and income resilient characteristics of floating rate exposure.