Monthly fund commentary State Street Floating Rate Fund
In February, the State Street Floating Rate Fund returned 0.35% (net), outperforming the benchmark by 0.06%.1
Australian money markets saw front-end yields continue to drift higher over the month, driven by a hawkish RBA policy move and robust domestic data. Early in the month, the RBA raised the cash rate by 25bp (as expected) and acknowledged more persistent inflation pressures. This, alongside upside surprises in key data January CPI at 3.8% y/y (vs 3.7% expected) and a stronger labor market fueled a front end led sell-off. BBSW rates reflected the tightening bias, with 1–3 month tenors rising ~10–15bp and 6-month BBSW climbing to 4.33% by month-end (up from 4.09%).
The RBA’s 25bp hike and upward revisions to near-term inflation forecasts initially reinforced expectations for further tightening, but this was quickly tempered by the Governor’s cautious tone in the post-meeting press conference. The Board’s reluctance to pre-commit to a path forward was later echoed in the February minutes, which highlighted a clear preference for waiting on additional data before making further decisions. This shift in tone saw March hike expectations retrace. Activity in short-term interest rate markets remained elevated, with investors adjusting positions in response to shifting policy signals. While some segments of the curve saw brief buying interest, overall pricing continued to reflect a cautious outlook. The Fund remains well positioned to take advantage of elevated front-end yields, supported by a constructive backdrop for new issuance. February saw $8.2 billion in FRNs come to market, led by Westpac’s $2.25 billion 2029 deal,2 reinforcing the depth of demand for high-quality front-end paper. The senior unsecured curve continues to offer attractive value in the current hiking cycle environment, and the Fund remains active in identifying opportunities that align with its risk and liquidity profile.
The State Street Floating Rate Fund has outperformed its benchmark over all time periods net of fees, delivering +0.91% of alpha over the past 12-months, +1.14% p.a. over the past 3-years and +0.88% p.a. since inception.
Looking ahead
Market update and outlook
February marked the strongest month for Australian bonds since April last year. The Bloomberg AusBond Treasury 0+ Yr Index gained +0.98%, while the broader AusBond Composite Index rose +0.88%. The rally was driven by a shift to risk-off sentiment and a dovish interpretation of the RBA’s minutes.
The RBA raised the cash rate by 25bp to 3.85% in February – its first hike since November 2023 – making it the first developed market central bank to tighten policy in 2026. While the move was widely expected, the tone of the accompanying statement and minutes was more balanced than hawkish. The Board reiterated that inflation remained too high and that further tightening may be required, but also acknowledged that monetary policy was “working to establish a more sustainable balance between supply and demand.” The February SoMP included only modest revisions to forecasts, with core inflation still expected to return to target by mid-2028. While the Bank noted that inflation had declined from its peak, the annual pace remained well above target, and the labour market, though easing at the margin, continued to show signs of tightness. Market pricing for further hikes faded over the month, particularly after the release of the minutes, which highlighted an increase in uncertainty around the economic outlook and a more data-dependent approach.
As we look ahead however, while some indicators have moderated at the margin, the broader data backdrop continues to justify a tightening bias. Barring a material deterioration in demand or inflation momentum, a further hike in May remains our base case. The risks remain tilted toward higher rates, though the path forward is increasingly complicated given the elevated global uncertainty, particularly around the conflict in the Middle East. As always, the RBA remains data dependent, but for now, the balance of evidence still leans toward further tightening.
Bottom line
“The best way to predict the future is to create it.” – Abraham Lincoln
Abraham Lincoln, the 16th President of the United States, is remembered not only for preserving the Union during the American Civil War but also for his visionary leadership and unwavering commitment to progress. His words reflect a deep belief in agency – the idea that shaping the future requires deliberate action, not passive observation. In financial markets, floating rate notes can embody this principle. By resetting with interest rates and maintaining short duration, FRNs may offer investors a proactive way to stay aligned with evolving policy conditions. In an environment where central banks remain data-dependent and inflation risks persist, FRNs provide a forward-looking solution – delivering elevated income, preserving capital, and offering the flexibility to adapt as the future unfolds.
While the RBA has signaled a preference to wait for further data, persistent inflation in services and a resilient labour market suggest that risks remain skewed toward additional tightening. As of mid-March, markets are pricing in approximately 75bps of further hikes by year-end, with March now shaping up as a live meeting. In this environment, floating rate notes continue to offer a compelling combination of elevated income, capital stability, and flexibility – attributes that are increasingly valuable amid ongoing policy uncertainty.
This backdrop creates a constructive environment for floating rate notes. As shown in Figure 1, the BBSW yield curve continued to shift higher through February and into March, lifting income expectations for FRNs without extending duration. At the same time, Figure 2 highlights the OIS-implied RBA rate path, where markets are pricing in further policy tightening over the course of 2026. Together, these dynamics support a favourable outlook for FRNs, offering investors elevated income, high credit quality, and a resilient, low-volatility structure well suited to a data-dependent and evolving policy environment.
Figure 1: BBSW yield curve
The BBSW (Bank Bill Swap Rate) yield curve reflects the market’s pricing of short-term bank funding costs across different maturities. A rising curve indicates higher expected short-term interest rates and increased income potential for floating rate notes. The shift higher across all tenors in February and into March signals tighter financial conditions and stronger carry - a dynamic that benefits Floating Rate Notes.
Figure 2 shows the market-implied path of the RBA cash rate using Overnight Index Swaps (OIS), which are derivatives that reflect expectations for future policy rates. The fourth-month forward rate is often used as a proxy for the next likely policy move. A rising forward curve suggests that investors are pricing in further tightening, and the slope of the curve reflects the pace and magnitude of expected changes.