Monthly Fund Commentary State Street Floating Rate Fund
In July, the State Street Floating Rate Fund returned 0.41% (net), outperforming the benchmark by 0.04%.1
Australian money markets were relatively steady through July, although BBSW rates finished modestly higher across most tenors as markets continued to price a restrictive policy backdrop. With no RBA meeting during the month, front-end pricing was driven by incoming data and shifting expectations for the August policy decision. One-month BBSW was little changed, ending July at 4.32% compared with 4.31% at the end of June, while 3-month BBSW rose from 4.46% to 4.50% and 6-month BBSW increased from 4.80% to 4.83%. Rates firmed into the final week of the month, with 3-month BBSW reaching 4.55% and 6-month BBSW 4.89%, before retracing after the softer June quarter CPI print reduced the near-term risk of another rate increase. Trading conditions remained orderly, with liquidity well supported despite volatility around policy expectations and the broader sell-off in longer-dated bonds.
July saw a busy month for primary issuances across the FRN market with approximately A$11 billion of new supply being issued. There were four major issuers NAB, CBA, Royal Bank of Canada and the Canadian Imperial Bank of Commerce accounting for $9.5 billion as each issued between $2 – 2.5 billion. The demand for highly rated credit remains strong and we continue to actively take advantage of pockets of market volatility to enhance the 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 +0.92% of alpha over the past 12-months, +1.10% p.a. over the past 3-years and +0.87% p.a. since inception.
Looking Ahead
Market Update and Outlook
Australian bonds sold off in July, reversing part of the strong gains recorded over May and June. The Bloomberg AusBond Treasury 0+ Yr Index returned -0.51%, while the Bloomberg AusBond Composite 0+ Yr Index returned -0.43%. Performance was weighed down by higher yields, with duration detracting across the curve. Carry provided some offset at the front end, but not enough to absorb the loss from the move higher in intermediate and longer-dated yields.
There was no RBA Board meeting in July, leaving markets to focus on the June quarter CPI release, labour market data and the likely policy path into the August meeting. The RBA had raised the cash rate three times earlier in the year, but by month end the case for another immediate increase had weakened with the June quarter CPI coming in softer than expected. At the same time, the labour market and housing indicators pointed to some easing in domestic conditions, giving the RBA scope to assess the impact of earlier tightening rather than move again straight away. The Board was still expected to retain a tightening bias given inflation remained above target and energy-related cost pressures continued to pose upside risks. While the decision was not made until after month end, the August meeting confirmed this assessment, with the RBA leaving the cash rate unchanged at 4.35% and the Board judging monetary policy to be “somewhat restrictive” but making clear it remained prepared to increase the cash rate target further “if upside risks materialise.”
The policy outlook appears to be shifting towards an extended hold as the softer June quarter CPI print and signs of slower activity have reduced the near-term risk of another rate hike. The RBA’s forecasts now point to inflation gradually returning toward target, but underlying inflation remains above the top of the band, capacity pressures have not fully eased and energy-related risks remain. This leaves the Board likely to maintain a hawkish bias until inflation is clearly moving back toward target. We expect the RBA to remain on hold in the near term, with a tightening bias retained as insurance against any renewed inflation pressures. Markets are likely to remain sensitive to incoming inflation, labour market and activity data, as the next policy move depends on whether inflation continues to ease without the economy slowing more sharply than expected.
Bottom Line
“I skate to where the puck is going to be, not where it has been.” — Wayne Gretzky
Wayne Gretzky is widely regarded as the greatest ice hockey player of all time, known not just for his skill but for his ability to read the game and position himself accordingly. His observation that “I skate to where the puck is going to be, not where it has been” highlights the importance of positioning. In investing, the same idea applies. Markets are always moving, and portfolios built only around what has just worked can quickly become exposed when conditions change. Successful investors need to look forward, assess where risks and opportunities may emerge next and position accordingly. That is particularly important in an uncertain macro environment, where balancing income, risk and flexibility can make a meaningful difference.
July provided a practical reminder of why floating rate notes remain relevant in the current environment. As illustrated in Figure 1, the State Street Floating Rate Fund returned +0.43% net during the month, while returns across fixed-rate maturity buckets weakened as yields increased. The 0–3 year segment held up with a +0.22% return, but performance turned negative further out the curve, ranging from -0.16% for 3–5 year Treasuries to -2.61% for 20 year+ Treasuries. The sell-off reflected markets repricing the outlook for inflation and monetary policy, with the largest losses concentrated in longer-dated Treasury exposures where interest rate sensitivity is greatest. By contrast, FRNs continued to deliver positive returns due to their near zero interest rate risk and with coupons that reset quarterly, benefit when yields move higher. For investors still seeking income but wary of taking a strong directional view on interest rates, the month highlighted the value of maintaining exposure to flexible short-duration linked assets like FRNs.
In the current environment, FRNs continue to offer a practical balance of income, capital stability and flexibility. The RBA has moved into a more patient phase, but the policy outlook remains restrictive with inflation is still above target and the Board retaining a clear tightening bias. That makes the path for longer-dated bonds more vulnerable to shifts in rate expectations, particularly if markets have to reprice the timing or scale of an eventual easing. By contrast, FRNs allow investors to earn income linked to prevailing short-term rates while limiting exposure to duration-driven capital losses. With the Fund delivering a positive return in a month when longer-maturity bonds sold off sharply, FRNs continue to provide a compelling allocation for investors who want to stay invested in fixed income without relying on a rally in bond yields to generate returns.
Figure 1 compares the July return of the State Street Floating Rate Fund against Bloomberg AusBond Treasury maturity bucket indices, ranging from 0–3 years through to 20 years+. It shows that the Fund delivered a positive return while Treasury returns weakened further out the curve, highlighting how the floating rate exposure performed as rising yields weighed on fixed-rate securities that have greater interest rate sensitivity.